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Undercut-proof Subgame Perfect Equilibrium of a Pricing Game

Author

Listed:
  • Debabrata Datta

    (Asutush College, Calcutta University)

  • Jaideep Roy

    (Institute of Economics, University of Copenhagen)

Abstract

Two firms selling a homogenous product to two types of buyers are involved in a sequential pricing game with zero costs. The pricing strategy available involves a fixed price and a royalty. It is shown that there exists a unique subgame perfect equilibrium with positive profits to both firms if and only if buyers differ significantly in their willingness to pay. In particular, the incumbent sets a positive royalty and sells to the low demand buyer while the entrant only charges a fixed price and sells to the high demand buyer, resulting in an undercut-proof subgame perfect equilibrium.

Suggested Citation

  • Debabrata Datta & Jaideep Roy, 2001. "Undercut-proof Subgame Perfect Equilibrium of a Pricing Game," Discussion Papers 01-04, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0104
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2001/0104.pdf/
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    References listed on IDEAS

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    More about this item

    Keywords

    Sequential Pricing; Fixed Price; Royalty; Undercut-proof Subgame Perfect Equilibrium Situation;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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