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Limit Pricing when Incumbents have Conflicting Interests

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  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

This paper considers entry into a market with two incumbents where one prefers and one dislikes entry. Unlike the entrant both incumbents know market demand. One would like to signal high demand, the other low. In separating equilibria incumbents choose full information Nash-equilibrium strategies in each state. Such equilibria only exists if entry is relatively unimportant for an incumbent compared with the cost of deviating to the other state’s Nash-strategy. In growing markets this condition will tend to be violated, and only pooling equilibria may exist. Sensible pooling equilibria have one incumbent distorting price upwards, the other downwards.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1997-17.

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Length: 34 pages
Date of creation: Jun 1997
Date of revision:
Publication status: Published in: International Journal of Industrial Organization, 17(6), 801-825, 1999
Handle: RePEc:kud:kuieci:1997-17

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Keywords: entry; incomplete information; oligopoly;

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References

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  1. 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.
  2. 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.
  3. 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.
  4. : Christian Schultz, . "Polarization and Inefficient Policies," Discussion Papers 93-16, University of Copenhagen. Department of Economics.
  5. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  6. Therese Flaherty, M., 1980. "Dynamic limit pricing, barriers to entry, and rational firms," Journal of Economic Theory, Elsevier, vol. 23(2), pages 160-182, October.
  7. Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March.
  8. 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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Citations

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Cited by:
  1. Emons, Winand & Fluet, Claude, 2011. "Non-comparative versus Comparative Advertising as a Quality Signal," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48713, Verein für Socialpolitik / German Economic Association.
  2. Bester, Helmut & Demuth, Juri, 2013. "Signalling Rivalry and Quality Uncertainty in a Duopoly," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 400, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Bipasa Datta, . "Experimentation, Information sharing and Oligopoly Limit Pricing," Discussion Papers 99/34, Department of Economics, University of York.
  4. Rupayan Pal & Bibhas Saha, 2008. "Union-Oligopoly Bargaining and Entry Deterrence:A Reassessment of Limit Pricing," Working Papers id:1375, eSocialSciences.
  5. Winand Emons & Claude Fluet, 2011. "Non-Comparative versus Comparative Advertising of Quality," Cahiers de recherche 1139, CIRPEE.
  6. Winand Emons & Claude Fluet, 2011. "Adversarial versus Inquisitorial Testimony," Cahiers de recherche 1122, CIRPEE.
  7. Müller, Wieland & Spiegel, Yossi & Yehezkel, Yaron, 2009. "Oligopoly limit-pricing in the lab," Games and Economic Behavior, Elsevier, vol. 66(1), pages 373-393, May.
  8. Jeong-Yoo Kim, 2003. "Entry Deterrence and Entry Inducement in an Industry with Complementary Products," International Economic Journal, Taylor & Francis Journals, vol. 17(4), pages 107-123.

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