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Information transmission and incentives not to price discriminate

  • Iñaki Aguirre

    ()

    (Departamento de Fundamentos del Aná}lisis Económico, Universidad del País Vasco, Avenida del Lehendakari Aguirre 83, 48015 Bilbao, Spain.)

This paper analyzes how the pricing policy of an incumbent may signal information not only on the demand level but also on the demand composition. A signalling game with two periods and two players (an established firm and a potential entrant) is considered. The potential entrant has incomplete information on market demand. There exist many sequential equilibria in which the uniform price policy acts as an entry deterrence device by hiding actual market profitability. We can interpret the uniform pricing policy as a rejection of the use of superior information on market demand composition in order to reduce the entrant's expected profits.

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Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 1 (1999)
Issue (Month): 3 ()
Pages: 283-299

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Handle: RePEc:spr:specre:v:1:y:1999:i:3:p:283-299
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  1. Cho, In-Koo & Sobel, Joel, 1990. "Strategic stability and uniqueness in signaling games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 381-413, April.
  2. Mailath, George J., 1991. "The impact of asymmetric information on entry deterrence: An example," Economics Letters, Elsevier, vol. 35(3), pages 333-338, March.
  3. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
  4. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, vol. 51(4), pages 981-96, July.
  5. Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
  6. Hobbs, Benjamin F, 1986. "Mill Pricing versus Spatial Price Discrimination under Bertrand and Cournot Spatial Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 173-91, December.
  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  8. Aguirre Perez, I, 1997. "Uniform Pricing : Good or Bad News About Market Profitability?," ASSET - Instituto De Economia Publica 149, ASSET (Association of Southern European Economic Theorists).
  9. Paul Krugman, 1986. "Industrial Organization and International Trade," NBER Working Papers 1957, National Bureau of Economic Research, Inc.
  10. Aguirre Perez, I, 1997. "Most-Favoured-Customer Pricing Policy as an Entry Deterrence Device," ASSET - Instituto De Economia Publica 151, ASSET (Association of Southern European Economic Theorists).
  11. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
  12. Neven, Damien J & Phlips, Louis, 1985. "Discriminating Oligopolists and Common Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 133-49, December.
  13. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  14. Salop, Steven C, 1979. "Strategic Entry Deterrence," American Economic Review, American Economic Association, vol. 69(2), pages 335-38, May.
  15. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  16. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
  17. HAMILTON, Jonathan H. & THISSE, Jacques-François & WESKAMP, Anita, . "Spatial discrimination. Bertrand vs. Cournot in a model of location choice," CORE Discussion Papers RP 846, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Aguirre, Inaki & Espinosa, Maria Paz & Macho-Stadler, Ines, 1998. "Strategic entry deterrence through spatial price discrimination," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 297-314, May.
  19. Anderson, Simon P & Neven, Damien J, 1991. "Cournot Competition Yields Spatial Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 793-808, November.
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