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Oligopoly Limit Pricing

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  • Kyle Bagwell
  • Garey Ramey

Abstract

We expand Milgrom and Roberts' (1982) limit pricing model to allow for multiple incumbents. Each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent's preentry price. We find that incumbents are unable to coordinate deception, which results in a separating equilibrium in which preentry prices are not distorted. Further, introducing the refinement of unprejudiced beliefs, we show that the no-distortion equilibrium is the only refined separating equilibrium. Plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.
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  • Kyle Bagwell & Garey Ramey, 1989. "Oligopoly Limit Pricing," Discussion Papers 829, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:829
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    References listed on IDEAS

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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    3. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215-215.
    4. B. Curtis Eaton & Roger Ware, 1987. "A Theory of Market Structure with Sequential Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 1-16, Spring.
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    9. McLean, Richard P. & Riordan, Michael H., 1989. "Industry structure with sequential technology choice," Journal of Economic Theory, Elsevier, vol. 47(1), pages 1-21, February.
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    12. Michael Waldman, 1987. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 301-310.
    13. Richard Gilbert & Xavier Vives, 1986. "Entry Deterrence and the Free Rider Problem," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 71-83.
    14. 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 981-996, July.
    15. 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.
    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. Eaton, B Curtis & Lipsey, Richard G, 1979. "The Theory of Market Pre-emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets," Economica, London School of Economics and Political Science, vol. 46(182), pages 149-158, May.
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