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Oligopoly limit-pricing in the lab

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  • Müller, Wieland
  • Spiegel, Yossi
  • Yehezkel, Yaron

Abstract

We examine the behavior of senders and receivers in the context of oligopoly limit pricing experiments in which high prices chosen by two privately informed incumbents may signal to a potential entrant that the industry-wide costs are high and that entry is unprofitable. The results provide strong support for the theoretical prediction that the incumbents can credibly deter unprofitable entry without having to distort their prices away from their full information levels. Yet, in a large number of cases, asymmetric information induces incumbents to raise prices when costs are low. The results also show that the entrants' behavior is by and large "bi-polar:" entrants tend to enter when the incumbents' prices are "low" but tend to stay out when the incumbents' prices are "high."

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 66 (2009)
Issue (Month): 1 (May)
Pages: 373-393

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Handle: RePEc:eee:gamebe:v:66:y:2009:i:1:p:373-393

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Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: Oligopoly limit pricing Multi-sender signaling Full information equilibrium Unprejudiced beliefs Experiments Strategy method;

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References

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  1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
  2. Claude Fluet & Paolo G. Garella, 1999. "Advertising and Prices as Signals of Quality in a Regime of Price Rivalry," Cahiers de recherche du Département des sciences économiques, UQAM 9903, Université du Québec à Montréal, Département des sciences économiques.
  3. de Bijl, Paul W. J., 1997. "Entry deterrence and signaling in markets for search goods," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 1-19, November.
  4. : Christian Schultz, . "Polarization and Inefficient Policies," Discussion Papers 93-16, University of Copenhagen. Department of Economics.
  5. Christian Schultz, 1997. "Limit Pricing when Incumbents have Conflicting Interests," CIE Discussion Papers 1997-17, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  6. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  7. Guillaume R. Frechette, 2001. "Update to random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(61).
  8. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Cesar Martinelli & Akihiko Matsui, 2000. "Policy Reversals and Electoral Competition with Privately Informed Parties," Working Papers 0003, Centro de Investigacion Economica, ITAM, revised Jul 2000.
  10. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(59).
  11. Cooper, David J & Garvin, Susan & Kagel, John H, 1997. "Adaptive Learning vs. Equilibrium Refinements in an Entry Limit Pricing Game," Economic Journal, Royal Economic Society, vol. 107(442), pages 553-75, May.
  12. Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March.
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