Undercut-proof Subgame Perfect Equilibrium of a Pricing Game
AbstractTwo firms selling a homogenous product to two types of buyers are involved in a sequential pricing game with zero costs. The pricing strategy available involves a fixed price and a royalty. It is shown that there exists a unique subgame perfect equilibrium with positive profits to both firms if and only if buyers differ significantly in their willingness to pay. In particular, the incumbent sets a positive royalty and sells to the low demand buyer while the entrant only charges a fixed price and sells to the high demand buyer, resulting in an undercut-proof subgame perfect equilibrium.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 01-04.
Length: 15 pages
Date of creation: Apr 2001
Date of revision:
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Sequential Pricing; Fixed Price; Royalty; Undercut-proof Subgame Perfect Equilibrium Situation;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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