Dynamic Limit Pricing
AbstractThis paper studies a simple multi-period model of limit pricing under one-sided incomplete information. I characterize pooling and separating equilibria, determine conditions under which the latter exist and study under which conditions on the primitives the equilibria involve limit pricing. The results are compared to a static benchmark. I identify two regimes that depend on the primitives of the model, namely a monopoly price regime and a limit price regime. In the former, the unique reasonable equilibrium involves immediate separation on monopoly prices. In the latter, I identify a unique class of reasonable limit price equilibria in which different types may initially pool for an arbitrary amount of time and then (possibly) separate. I argue that in a reasonable equilibrium, all signaling takes place in a single period (if the informed player is able to do so). If separation occurs in finite time, this involves setting prices that are so low that the inefficient incumbent's profits from mimicking are strictly negative. With a sufficiently high discount factor, the losses from mimicking may become arbitrarily large.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8104.
Date of creation: Nov 2010
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Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - 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
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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