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Limit Pricing when Incumbents have Conflicting Interests

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

This paper considers entry into a market with two incumbents where one prefers and one dislikes entry. Unlike the entrant both incumbents know market demand. One would like to signal high demand, the other low. In separating equilibria incumbents choose full information Nash-equilibrium strategies in each state. Such equilibria only exists if entry is relatively unimportant for an incumbent compared with the cost of deviating to the other state’s Nash-strategy. In growing markets this condition will tend to be violated, and only pooling equilibria may exist. Sensible pooling equilibria have one incumbent distorting price upwards, the other downwards.

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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1997-17.

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Length: 34 pages
Date of creation: Jun 1997
Date of revision:
Publication status: Published in: International Journal of Industrial Organization, 17(6), 801-825, 1999
Handle: RePEc:kud:kuieci:1997-17
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  1. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
  2. Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March.
  3. Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer.
  4. : Christian Schultz, . "Polarization and Inefficient Policies," Discussion Papers 93-16, University of Copenhagen. Department of Economics.
  5. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  6. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Therese Flaherty, M., 1980. "Dynamic limit pricing, barriers to entry, and rational firms," Journal of Economic Theory, Elsevier, vol. 23(2), pages 160-182, October.
  8. 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.
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