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Discriminatory Limit Pricing

Author

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  • Sílvia Jorge

    () (Universidade de Aveiro)

  • Cesaltina Pires

    (Universidade de Évora)

Abstract

We consider a two-period framework where a multimarket incumbent firm faces, in one of the markets, a single potential entrant offering a differentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We find multiple pure strategy perfect bayesian equilibria. Using equilibrium refine- ments, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant.

Suggested Citation

  • Sílvia Jorge & Cesaltina Pires, 2007. "Discriminatory Limit Pricing," Working Papers de Economia (Economics Working Papers) 42, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  • Handle: RePEc:ave:wpaper:422007
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    Keywords

    Entry Deterrence; Product Differentiation; Asymmetric Information; Discriminatory Pricing;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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