Edgeworth Price Cycle

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.

BREAKING DOWN '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. Low-Cost Producer

    A company that can provide goods or services at a low cost. In ...
  2. Follow-The-Leader Pricing

    A pricing strategy in which a business sets the price of its ...
  3. Predatory Pricing

    The act of setting prices low in an attempt to eliminate the ...
  4. Price War

    When companies continuously lower prices to undercut the competition. ...
  5. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it ...
  6. Price Leadership

    When a firm that is the leader in its sector determines the price ...
Related Articles
  1. Investing Basics

    The Industry Handbook: The Retailing Industry

    All businesses that sell goods and services to consumers fall under the umbrella of retailing, but there are several directions we can take from here. For starters, there are department stores, ...
  2. Fundamental Analysis

    The 4 R's Of Investing In Retail

    In retail, successfully managing return on investment (ROI) and other financial indicators is the key to a healthy business.
  3. Active Trading

    Why You Can't Influence Gas Prices

    Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices.
  4. Term

    How Penetration Pricing Works

    Penetration pricing unveils a new product or service at an initially low price to attract customers away from competitors.
  5. Investing Basics

    Why Gasoline Costs What It Does

    The next time you have to dig deep into your wallet to fill your gas tank at least you'll know exactly what you're paying for.
  6. Investing

    Choosing The Winners In The Click-And-Mortar Game

    E-tailing has changed the way consumers do nearly everything. Do you know how to pick the best retailer?
  7. Economics

    What's a Competitive Advantage?

    A competitive advantage is an advantage a firm has over its competitors.
  8. Economics

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
  9. Economics

    The Gas Price Rollercoaster

    Gas prices in the United States continue to fluctuate, but they are slowly dropping.
  10. Fundamental Analysis

    4 Factors You Didn't Know About RBOB

    Learn the basics of how RBOB is traded, including the specifications for the RBOB futures contract. Discover what impacts the price of RBOB.
RELATED FAQS
  1. What factors are the primary drivers of share prices in the retail sector?

    Find out which factors investors need to consider when evaluating companies in the retail sector, including the basic fundamentals. Read Answer >>
  2. What profit margin is usual for a company in the retail sector?

    Find out the typical profit margin for a major retail company, and learn how it compares to the profit margins for other ... Read Answer >>
  3. What strategies do companies use to regain market share they have lost?

    Learn about the three simplest ways companies can regain lost market share: pricing changes, promotional changes and product ... Read Answer >>
  4. What are the most popular companies in the retail sector?

    Learn about some examples of popular companies in the retail sector. Understand what makes these retail companies popular ... Read Answer >>
  5. How does the long-term outlook of the retail sector compare to the broader economy?

    Find out why the retail sector is primed for strong growth moving forward, especially online retail, and learn why it outperforms ... Read Answer >>
  6. What countries represent the largest portion of the global retail sector?

    Learn about the five countries that dominate the global retail sector: Japan, Germany, the United Kingdom, China and the ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center