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Optimal pricing strategy for foreign market entry: a game theoretic approach

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  • Young-Han Kim

    (Department of Economics, Sungkyunkwan University, 53 Myungnyun-Dong 3-ga, Chongno-Gu, Seoul, 110-745, Korea)

  • Praveen Aggarwal

    (Department of Marketing, University of Minnesota Duluth, 412 Library Drive, Duluth, MN 55812, USA)

  • Young-Myung Ha

    (Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea)

  • Tai Hoon Cha

    (Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea)

Abstract

Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Young-Han Kim & Praveen Aggarwal & Young-Myung Ha & Tai Hoon Cha, 2006. "Optimal pricing strategy for foreign market entry: a game theoretic approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(8), pages 643-653.
  • Handle: RePEc:wly:mgtdec:v:27:y:2006:i:8:p:643-653 DOI: 10.1002/mde.1297
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    References listed on IDEAS

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    1. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    2. Bagwell, Kyle, 1990. "Informational product differentiation as a barrier to entry," International Journal of Industrial Organization, Elsevier, pages 207-223.
    3. Terry Clark & Masaaki Kotabe & Dan Rajaratnam, 1999. "Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 30(2), pages 249-268, June.
    4. Moraga-Gonzalez, Jose Luis, 2000. "Quality uncertainty and informative advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 615-640, May.
    5. Ford, Gary T & Smith, Ruth Ann, 1987. " Inferential Beliefs in Consumer Evaluations: An Assessment of Alternative Processing Strategies," Journal of Consumer Research, Oxford University Press, vol. 14(3), pages 363-371, December.
    6. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    7. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
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