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Pricing behaviour at capacity constrained facilities

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  • Huric Larsen, Jesper Fredborg

Abstract

Entry of new firms can be difficult or even impossible at capacity constrained facilities, despite the actual cost of entering is low. Using a game theoretic model of incumbent firms’ pricing behaviour under these conditions, it is found that under the assumption of Bertrand competition and firms having different costs, the optimal pricing behaviour imply price stickiness and upward pricing. The findings further suggest a competitive behaviour of incumbents of disposing weaker opponents only if, it leads to weaker competitors entering the market and to use weaker opponents to shelter the incumbent. The results propose a new explanation of the mixed empirical findings on incumbent pricing to entry and suggest that competition authorities should use an effect-based approach to detect the behaviour.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39362.

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Date of creation: 01 Feb 2012
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Handle: RePEc:pra:mprapa:39362

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Keywords: Pricing behaviour; capacity constrained; congestion; game theory; competition policy; regulation; games of incomplete and asymmetric information; Bayesian equilibrium;

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  1. Gilbert, Richard J., 1988. "The Role of Potential Competition in Industrial Organization," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt01s8v4v3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  12. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
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  14. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
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