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Pricing strategy, quality signaling, and entry deterrence

  • Utaka, Atsuo
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    I investigate a pricing strategy that is aimed at deterring entry by applying a two-period model of a durable-goods monopolist. There exists an incumbent that is of two types, that is, high and low quality types. They differ in terms of their R&D capabilities, and the incumbent's type is assumed to be unknown to an entrant. If the entrant decided to enter the market, Nash-Bertrand price competition ensues between the incumbent and the entrant. I show that not only limit pricing but also prestige pricing signals the incumbent's quality type, which serves to discourage entry. In the prestige pricing, the high-quality type sells the products at an intentionally higher price. I also show that although limit pricing is more desirable than prestige pricing from a social welfare viewpoint, the incumbent can still choose prestige pricing.

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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 26 (2008)
    Issue (Month): 4 (July)
    Pages: 878-888

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    Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:878-888
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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