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Undercut-proof Subgame Perfect Equilibrium of a Pricing Game

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Author Info

  • Debabrata Datta

    (Asutush College, Calcutta University)

  • Jaideep Roy

    (Institute of Economics, University of Copenhagen)

Abstract

Two 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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File URL: http://www.econ.ku.dk/english/research/publications/wp/2001/0104.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 01-04.

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Length: 15 pages
Date of creation: Apr 2001
Date of revision:
Handle: RePEc:kud:kuiedp:0104

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Keywords: Sequential Pricing; Fixed Price; Royalty; Undercut-proof Subgame Perfect Equilibrium Situation;

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