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Pricing behaviour at capacity constrained facilities

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  • Huric Larsen, Jesper Fredborg

Abstract

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.

Suggested Citation

  • Huric Larsen, Jesper Fredborg, 2012. "Pricing behaviour at capacity constrained facilities," MPRA Paper 39362, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39362
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    File URL: https://mpra.ub.uni-muenchen.de/39362/1/MPRA_paper_39362.pdf
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    References listed on IDEAS

    as
    1. Jeffrey M. Perloff & Steven C. Salop, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 107-120.
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    14. 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.
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    More about this item

    Keywords

    Pricing behaviour; capacity constrained; congestion; game theory; competition policy; regulation; games of incomplete and asymmetric information; Bayesian equilibrium;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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