Limit-Pricing and Learning-By-Doing: A Dynamic Game with Incomplete Information
We study a firm's pricing/output strategy under threat of entry in a two-period game with asymmetric information, where the firm can reduce future cost through learning-by-doing. In contrast with previous literature, we show that a firm's incentive to reduce cost through higher production may not align with its incentive to signal its cost type. As a consequence, in equilibrium, the incumbent firm might distort its price upward instead of downward.
Volume (Year): 9 (2010)
Issue (Month): 3 (December)
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- Dixit, Avinash, 1979.
"The Role of Investment in Entry-Deterrence,"
The Warwick Economics Research Paper Series (TWERPS)
140, University of Warwick, Department of Economics.
- Paul Milgrom & John Roberts, 1998.
"Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis,"
Levine's Working Paper Archive
245, David K. Levine.
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- A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
- Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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