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Oligopoly Limit Pricing

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  • Kyle Bagwell
  • Garey Ramey

Abstract

We expand Milgrom and Roberts' (1982) limit pricing model to allow for multiple incumbents. Each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent's preentry price. We find that incumbents are unable to coordinate deception, which results in a separating equilibrium in which preentry prices are not distorted. Further, introducing the refinement of unprejudiced beliefs, we show that the no-distortion equilibrium is the only refined separating equilibrium. Plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.

Suggested Citation

  • Kyle Bagwell & Garey Ramey, 1991. "Oligopoly Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 155-172, Summer.
    • Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:155-172
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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
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    4. B. Curtis Eaton & Roger Ware, 1987. "A Theory of Market Structure with Sequential Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 1-16, Spring.
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    6. Giacomo Bonanno, 1987. "Location Choice, Product Proliferation and Entry Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 37-45.
    7. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer.
    8. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
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    11. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    12. Michael Waldman, 1987. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(2), pages 301-310.
    13. Richard Gilbert & Xavier Vives, 1986. "Entry Deterrence and the Free Rider Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 71-83.
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    17. repec:bla:econom:v:46:y:1979:i:182:p:149-58 is not listed on IDEAS
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