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. Market Price

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

    The average of current prices across the entire spectrum of goods ...
  6. Setup Price

    A price level predetermined as the point of entry into a specific ...
Related Articles
  1. Target Prices: The Key To Sound Investing
    Economics

    Target Prices: The Key To Sound Investing

  2. An Introduction To Stock Market Indexes
    Investing Basics

    An Introduction To Stock Market Indexes

  3. Support And Resistance Basics
    Active Trading Fundamentals

    Support And Resistance Basics

  4. Introduction To Technical Analysis Price ...
    Trading Strategies

    Introduction To Technical Analysis Price ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center