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Oligopoly Limit Pricing

  • Kyle Bagwell
  • Garey Ramey

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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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 829.

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Date of creation: Apr 1989
Date of revision:
Handle: RePEc:nwu:cmsems:829
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  1. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
  2. repec:bla:restud:v:54:y:1987:i:1:p:37-45 is not listed on IDEAS
  3. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  4. repec:bla:restud:v:53:y:1986:i:1:p:71-83 is not listed on IDEAS
  5. Michael Waldman, 1985. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," UCLA Economics Working Papers 364, UCLA Department of Economics.
  6. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
  7. B. Curtis Eaton & Richard G. Lipsey, 1980. "Exit Barriers are Entry Barriers: The Durability of Capital as a Barrier to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 721-729, Autumn.
  8. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  9. 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.
  10. Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 227-250, December.
  11. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  12. 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.
  13. 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.
  14. Steven A. Matthews & Leonard J. Mirman, 1981. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Discussion Papers 494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. 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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