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Anti-Limit Pricing

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  • Jun, Byoung Heon
  • Park, In-Uck

Abstract

Extending Milgrom and Roberts (1982), we analyze an infinite horizon entry model where an incumbent may use its current price to signal its strength, in order to deter entry. In contrast with conventional limit pricing, we show the entry of weaker firms. We also provide necessary and sufficient conditions for this phenomenon to arise in equilibrium, in the benchmark cases that no second entry is profitable.

Suggested Citation

  • Jun, Byoung Heon & Park, In-Uck, 2010. "Anti-Limit Pricing," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(2), pages 1-22, December.
    • Handle: RePEc:hit:hitjec:v:51:y:2010:i:2:p:1-22
    DOI: 10.15057/18774
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    References listed on IDEAS

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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 443-459, March.
    2. Kyle Bagwell & Garey Ramey, 1991. "Oligopoly Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 155-172, Summer.
    3. Jeroen M. Swinkels, 1997. "Education Signaling with Preemptive Offers," Discussion Papers 1175, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Jun, Byoung Heon & Park, In-Uck, 2010. "Anti-Limit Pricing," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(2), pages 1-22, December.
    5. Kaya, Ayça, 2009. "Repeated signaling games," Games and Economic Behavior, Elsevier, vol. 66(2), pages 841-854, July.
    6. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, vol. 51(4), pages 981-996, July.
    7. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    8. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    9. Kremer, Ilan & Skrzypacz, Andrzej, 2007. "Dynamic signaling and market breakdown," Journal of Economic Theory, Elsevier, vol. 133(1), pages 58-82, March.
    10. Ashiya, Masahiro, 2000. "Weak entrants are welcome," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 975-984, August.
    11. Overgaard, Per Baltzer, 1994. "Equilibrium effects of potential entry when prices signal quality," European Economic Review, Elsevier, vol. 38(2), pages 367-383, February.
    12. Katharine E. Rockett, 1990. "Choosing the Competition and Patent Licensing," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 161-171, Spring.
    13. Harrington, Joseph E, Jr, 1986. "Limit Pricing When the Potential Entrant Is Uncertain of Its Cost Function [Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis]," Econometrica, Econometric Society, vol. 54(2), pages 429-437, March.
    14. B. Douglas Bernheim, 1984. "Strategic Deterrence of Sequential Entry into an Industry," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 1-11, Spring.
    15. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    16. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
    17. Oz Shy, 1996. "Industrial Organization: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691795, December.
    18. Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer.
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    Cited by:

    1. Jun, Byoung Heon & Park, In-Uck, 2010. "Anti-Limit Pricing," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(2), pages 1-22, December.

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    More about this item

    Keywords

    Dynamic Signaling; Limit Pricing; Entry Deterrence;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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