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List pricing and discounting in a Bertrand-Edgeworth duopoly

  • García Díaz, Antón
  • Hernán González, Roberto
  • Kujal, Praveen

List, or retail, pricing is a widely used trading institution where firms announce a price that may be discounted at a later stage. Competition authorities view list pricing and discounting as a procompetitive practice. We modify the standard Bertrand-Edgeworth duopoly model to include list pricing and a subsequent discounting stage. Both firms first simultaneously choose a maximum list price and then decide whether to discount, or not, in a subsequent stage. We show that list pricing works as a credible commitment device that induces a pure strategy outcome. This is true for a general class of rationing rules. Further unlike the dominant firm interpretation of a price leader, the low capacity firm may have incentives to commit to a low price and in this sense assume the role of a leader.

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

Volume (Year): 27 (2009)
Issue (Month): 6 (November)
Pages: 719-727

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Handle: RePEc:eee:indorg:v:27:y:2009:i:6:p:719-727
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