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Pricing behaviour at capacity constrained facilities

  • Huric Larsen, Jesper Fredborg

Entry of new firms can be difficult or even impossible at capacity constrained facilities, despite the actual cost of entering is low. Using a game theoretic model of incumbent firms’ pricing behaviour under these conditions, it is found that under the assumption of Bertrand competition and firms having different costs, the optimal pricing behaviour imply price stickiness and upward pricing. The findings further suggest a competitive behaviour of incumbents of disposing weaker opponents only if, it leads to weaker competitors entering the market and to use weaker opponents to shelter the incumbent. The results propose a new explanation of the mixed empirical findings on incumbent pricing to entry and suggest that competition authorities should use an effect-based approach to detect the behaviour.

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File URL: http://mpra.ub.uni-muenchen.de/39362/1/MPRA_paper_39362.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39362.

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Date of creation: 01 Feb 2012
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Handle: RePEc:pra:mprapa:39362
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  1. Joskow, Andrew S. & Werden, Gregory J. & Johnson, Richard L., 1994. "Entry, exit, and performance in airline markets," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 457-471, December.
  2. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
  3. Gilbert, Richard J, 1989. "The Role of Potential Competition in Industrial Organization," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 107-27, Summer.
  4. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  5. Richard G. Frank & David S. Salkever, 1995. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc.
  6. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  7. Robert D. Cairns & John W. Galbraith, 1990. "Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs," Canadian Journal of Economics, Canadian Economics Association, vol. 23(4), pages 807-16, November.
  8. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
  9. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  10. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
  11. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
  12. Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
  13. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
  14. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  15. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  16. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
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