Edgeworth Price Cycle

AAA

DEFINITION of 'Edgeworth Price Cycle'

In markets with homogenous goods, a sequence of rapid, incremental price cutting among competitors that lowers the retail price until it reaches the cost of the good. Eventually, competitors reset prices to their previous levels (allowing a normal retailer profit) and other competitors follow. This cycle may occur very rapidly in markets where there is heavy price competition.

INVESTOPEDIA EXPLAINS 'Edgeworth Price Cycle'

Engaging in this type of recurring price war hurts profits, but is difficult to avoid in some markets. When consumers are highly price sensitive, having a slightly higher price may significantly deter business, thus forcing a rapid price cut. Businesses attempt to differentiate their goods whenever possible so that a homogenous market does not exist. For example, in the gasoline market, retailers insert additives which supposedly make the brand of gasoline superior to others. These attempts at differentiation have met with limited success, however, and thus Edgeworth price cycling remains a problem in gasoline retailing.

RELATED TERMS
  1. Product Life Cycle

    The period of time over which an item is developed, brought to ...
  2. Theory Of Price

    An economic theory that contends that the price for any specific ...
  3. Memory-Of-Price Strategy

    A trading strategy that assumes the support and resistance points ...
  4. Setup Price

    A price level predetermined as the point of entry into a specific ...
  5. Market Price

    The current price at which an asset or service can be bought ...
  6. Price Level

    The average of current prices across the entire spectrum of goods ...
RELATED FAQS
  1. When is it useful to look at a company's fixed asset turnover ratio?

    It is useful to look at a company's fixed asset turnover ratio when an outside observer, such as an investor, wants to know ... Read Full Answer >>
  2. What is the difference between perfect and imperfect competition?

    Perfect competition is a microeconomics concept that describes a market structure controlled entirely by market forces. In ... Read Full Answer >>
  3. How difficult is it to understand business analytics?

    In the abstract, business analytics is the study of financial, economic, consumer and production data through statistical ... Read Full Answer >>
  4. At what levels are core competencies required for businesses operating in the primary ...

    Core competencies help businesses understand their best abilities to perform in the market. Primary sector businesses mine ... Read Full Answer >>
  5. What are the variables in variable costs?

    Variable cost is an economic term that refers to an expense a company is facing that varies based on factors that are inconsistent ... Read Full Answer >>
  6. Can Internet companies be vertically integrated?

    Internet companies can be vertically integrated, just as traditional businesses vertically integrate to consolidate costs ... Read Full Answer >>
Related Articles
  1. Economics

    Target Prices: The Key To Sound Investing

    Learn how to evaluate the legitimacy of target prices and why investors should trust these over ratings.
  2. Investing Basics

    An Introduction To Stock Market Indexes

    Investopedia explains the five most talked about indexes and what makes them all different.
  3. Active Trading Fundamentals

    Support And Resistance Basics

    Understanding the concept of Support and Resistance in trading can drastically improve your short-term investing strategy.
  4. Trading Strategies

    Introduction To Technical Analysis Price Patterns

    To "find your game" in technical analysis, you need to be able to recognize reversals and continuations as they form.
  5. Forex Education

    Using Double Tops And Double Bottoms In Currency Trading

    Find out how to apply the two most common price reversal patterns to your trading.
  6. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  7. Economics

    Understanding Economic Order Quantity

    Economic order quantity is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory.
  8. Economics

    What is Net Margin?

    The ratio of net profits to revenues for a company that shows how much of each dollar earned by the company is translated into profits.
  9. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  10. Economics

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center