Dynamic Limit Pricing

Economics

Speaker:Flavio Toxvaerd, University of Cambridge
Website: http://www.econ.cam.ac.uk/faculty/toxvaerd/
Date: Friday 27 October 2006
Time: 16:15
Location: Lecture Room D, Streatham Court

Further details

This paper studies a simple multi-period model of limit pricing under one-sided incomplete information. I characterize pooling and separating equilibria, determine conditions under which the latter exist and study under which conditions on the primitives the equilibria involve limit pricing. The results are compared to a static benchmark in the spirit of Milgrom and Roberts (1982). I identify two regimes that depend on the primitives of the model, namely a monopoly price regime and a limit price regime. In the former, the unique reasonable equilibrium is separating and both types of incumbent set their respective monopoly prices. In the latter, both reasonable pooling and separating equilibria exist and both involve limit pricing. In the monopoly price regime, the set of limit price equilibria expands as the horizon recedes, but the reasonable equilibrium remains unchanged. In the limit price regime, equilibrium existence becomes easier to obtain but these equilibria may, if the players are sufficiently patient, involve prices that confer infinitely large losses in order for separation to be incentive compatible. Last, I consider a perturbed version of the model and find that the equilibria of this game, separating as well as pooling, correspond in a natural way to the equilibria of the static benchmark game.
Keywords: Dynamic limit pricing, entry deterrence, repeated signaling.
JEL Classification: D43, D82, L11, L41.