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Oligopoly Limit Pricing

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  • Kyle Bagwell
  • Garey Ramey

Abstract

We expand Milgrom and Roberts' (1982) limit pricing model to allow for multiple incumbents. Each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent's preentry price. We find that incumbents are unable to coordinate deception, which results in a separating equilibrium in which preentry prices are not distorted. Further, introducing the refinement of unprejudiced beliefs, we show that the no-distortion equilibrium is the only refined separating equilibrium. Plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 22 (1991)
Issue (Month): 2 (Summer)
Pages: 155-172

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Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:155-172

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  1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 443-59, March.
  2. Gilbert, Richard & Vives, Xavier, 1986. "Entry Deterrence and the Free Rider Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 71-83, January.
  3. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 863-94, July.
  4. Steven A. Matthews & Leonard J. Mirman, 1981. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 8(1), pages 93-113.
  6. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 215.
  8. Bonanno, Giacomo, 1987. "Location Choice, Product Proliferation and Entry Deterrence," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(1), pages 37-45, January.
  9. McLean, Richard P. & Riordan, Michael H., 1989. "Industry structure with sequential technology choice," Journal of Economic Theory, Elsevier, Elsevier, vol. 47(1), pages 1-21, February.
  10. Waldman, Michael, 1987. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(2), pages 301-10, April.
  11. B. Curtis Eaton & Roger Ware, 1987. "A Theory of Market Structure with Sequential Entry," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 18(1), pages 1-16, Spring.
  12. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  13. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(357), pages 95-106, March.
  14. Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, Elsevier, vol. 31(2), pages 227-250, December.
  15. B. Curtis Eaton & Richard G. Lipsey, 1980. "Exit Barriers are Entry Barriers: The Durability of Capital as a Barrier to Entry," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(2), pages 721-729, Autumn.
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