Limit Pricing Case Study. Historically, there have been substantial costs of entry into the steel industry. The technology favors vertical integration at least from the extraction of iron through smelting, refining, rolling, and the production of finished steel products such as steel plate and bars. Fully integrated entry requires a substantial investment. Because such entry is risky, the cost financial capital will be higher for an entrant than a going concern. This will place entrants at a cost disadvantage compared with operating firms. Further, entry into the steel industry involves large sunk costs: there is not much one can do with a steel mill except produce steel. If a firm decided to leave the industry, it could not easily transfer its investment in the assets to another market. It would have to be content with the best price it could get for the assets in the steel in the steel industry. This increases the risk of deciding to enter the steel industry.
Toward the end of the nineteenth century, cartels were unsuccessful in controlling frequent price wars and intense rivalry in the U.S. steel industry. This induced s series of mergers that concentrated steel sales in the hands of a few large firms. The culmination of this movement came in 1901, when U.S. steel was formed by the merger of a dozen companies. Each of these companies was itself the survivor of previously independent firms. U.S. steel combined the as sets of some 180 previously independent firms. At the time of its formation, U.S. steel controlled roughly 65 per cent of the nation’s steel capacity. The merger prompted one of the early landmark antitrust cases under the Sherman act, a case which we will later discuss.
As shown in Figure 4 – 4, U.S. steel’s market share has declined throughout the twentieth century. In particular, new technology now enables steel “minimills” to compete on a cost – effective basis with large integrated firms. It seems likely that entry into the steel industry is substantially easier today than it was at the turn of the century. But the gradual decline in market share depicted in Figure 4 – 4 is just what the dynamic limit price: a high price set to gain short run profits, with a gradual loss a market share to rivals. Limit Pricing Case Study.
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