Limit pricing is a strategy used by a dominant company to set its prices below the cost that new competitors would face to enter the market. By doing this, the dominant firm makes it unprofitable for new companies to compete, which helps the incumbent firm keep its market dominance.

Key characteristics of this strategy include:

• The price is set lower than the minimum average cost of any potential new competitor.
• If new companies try to enter the market at this price, they will face a financial loss, even if they sell a large amount of products.
• The incumbent firm can often afford this price because it has lower production costs, such as better technology or economies of scale.
• It is often used by natural monopolies or companies that were the first to enter a market.

This strategy is effective if new competitors believe the dominant firm will fight hard to keep its market share. If the dominant firm can keep prices low for a long time, it successfully prevents new rivals from entering the market.