Advertising and Limit Pricing
We enrich Milgrom and Roberts' (1982) limit-pricing model to allow an incumbent to signal his costs with both price and advertisements. Our fundamental result is that a cost-reducing distortion occurs, in that the incumbent behaves as if there were complete information but his costs were lower than they are. Preentry price is therefore distorted downward, and demand-enhancing advertising is distorted upward, as a consequence of signalling. If advertising is a purely dissipative signal, it is not used, nor therefore distorted. Recent refinements of the sequential equilibrium concept are featured.
Volume (Year): 19 (1988)
Issue (Month): 1 (Spring)
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- Milgrom, Paul & Roberts, John, 1982.
"Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis,"
Econometric Society, vol. 50(2), pages 443-59, March.
- Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
- Moulin, Herve, 1994. "Social choice," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 31, pages 1091-1125 Elsevier.
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"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Kyle Bagwell, 1987.
"Introductory Price as a Signal of Cost in a Model of Repeat Business,"
722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
- Salop, Steven C, 1979. "Strategic Entry Deterrence," American Economic Review, American Economic Association, vol. 69(2), pages 335-38, May.
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- Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
- Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
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