Limit pricing when incumbents have conflicting interests
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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Levine's Working Paper Archive
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