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Oligopoly limit-pricing in the lab

  • Müller, Wieland
  • Spiegel, Yossi
  • Yehezkel, Yaron

We examine the behavior of senders and receivers in the context of oligopoly limit pricing experiments in which high prices chosen by two privately informed incumbents may signal to a potential entrant that the industry-wide costs are high and that entry is unprofitable. The results provide strong support for the theoretical prediction that the incumbents can credibly deter unprofitable entry without having to distort their prices away from their full information levels. Yet, in a large number of cases, asymmetric information induces incumbents to raise prices when costs are low. The results also show that the entrants' behavior is by and large "bi-polar:" entrants tend to enter when the incumbents' prices are "low" but tend to stay out when the incumbents' prices are "high."

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 66 (2009)
Issue (Month): 1 (May)
Pages: 373-393

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Handle: RePEc:eee:gamebe:v:66:y:2009:i:1:p:373-393
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
  2. Harrington, Joseph E, Jr, 1986. "Limit Pricing When the Potential Entrant Is Uncertain of Its Cost Function [Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis]," Econometrica, Econometric Society, vol. 54(2), pages 429-37, March.
  3. David J. Cooper & Susan Garvin & John H. Kagel, 1997. "Signalling and Adaptive Learning in an Entry Limit Pricing Game," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 662-683, Winter.
  4. Schultz, Christian, 1999. "Limit pricing when incumbents have conflicting interests," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 801-825, August.
  5. : Christian Schultz, . "Polarization and Inefficient Policies," Discussion Papers 93-16, University of Copenhagen. Department of Economics.
  6. Cesar Martinelli & Akihiko Matsui, 2000. "Policy Reversals and Electoral Competition with Privately Informed Parties," Working Papers 0003, Centro de Investigacion Economica, ITAM, revised Jul 2000.
  7. Kyle Bagwell & Garey Ramey, 1989. "Oligopoly Limit Pricing," Discussion Papers 829, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
  9. Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March.
  10. 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.
  11. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  12. 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.
  13. Cooper, David J & Garvin, Susan & Kagel, John H, 1997. "Adaptive Learning vs. Equilibrium Refinements in an Entry Limit Pricing Game," Economic Journal, Royal Economic Society, vol. 107(442), pages 553-75, May.
  14. de Bijl, Paul W. J., 1997. "Entry deterrence and signaling in markets for search goods," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 1-19, November.
  15. Guillaume R. Frechette, 2001. "Update to random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(61).
  16. Guillaume R. Frechette, 2001. "Random-effects ordered probit," Stata Technical Bulletin, StataCorp LP, vol. 10(59).
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