We study a two periods entry game where the incumbent rm, who has private information about his own production costs, makes a non observable long run investment choice, along with a pricing decision observed by the entrant. The investment choice aff ects both post-entry competition and fi rst period cost of production, so that the cost of signaling becomes endogenous. The game is solved following Bayes-Nash requirements, the intuitive criterion is used to constrain o -equilibrium beliefs. When investment is publicly observable, it is shown that the unique intuitive equilibrium is the separating equilibrium with limit pricing and no entry deterrence. When investment is not observable, quite remarkably, there exists a unique intuitive pooling equilibrium which is Pareto superior, from the incumbent's point of view, to the unique intuitive separating equilibrium. In the pooling equilibrium no entry takes place and the price is below the low cost monopoly price. Thus, when investment is secret, a limit pricing policy supports entry deterrence. Our model provides an example of secret barriers to entry and their relationship with limit pricing. We also contribute to the analysis of a relatively under-researched class of games where the cost of signaling unobservable characteristics is endogenously determined by unobserved actions.

Brighi, L. e M., D'Amato. "Limit pricing and secret barriers to entry" Working paper, DEMB WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi - Università di Modena e Reggio Emilia, 2014. https://doi.org/10.25431/11380_1066209

Limit pricing and secret barriers to entry

Brighi, L.;D'Amato, M.
2014

Abstract

We study a two periods entry game where the incumbent rm, who has private information about his own production costs, makes a non observable long run investment choice, along with a pricing decision observed by the entrant. The investment choice aff ects both post-entry competition and fi rst period cost of production, so that the cost of signaling becomes endogenous. The game is solved following Bayes-Nash requirements, the intuitive criterion is used to constrain o -equilibrium beliefs. When investment is publicly observable, it is shown that the unique intuitive equilibrium is the separating equilibrium with limit pricing and no entry deterrence. When investment is not observable, quite remarkably, there exists a unique intuitive pooling equilibrium which is Pareto superior, from the incumbent's point of view, to the unique intuitive separating equilibrium. In the pooling equilibrium no entry takes place and the price is below the low cost monopoly price. Thus, when investment is secret, a limit pricing policy supports entry deterrence. Our model provides an example of secret barriers to entry and their relationship with limit pricing. We also contribute to the analysis of a relatively under-researched class of games where the cost of signaling unobservable characteristics is endogenously determined by unobserved actions.
2014
Dicembre
Brighi, L.; D'Amato, M.
Brighi, L. e M., D'Amato. "Limit pricing and secret barriers to entry" Working paper, DEMB WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi - Università di Modena e Reggio Emilia, 2014. https://doi.org/10.25431/11380_1066209
File in questo prodotto:
File Dimensione Formato  
0039.pdf

Open access

Tipologia: Versione pubblicata dall'editore
Dimensione 462.91 kB
Formato Adobe PDF
462.91 kB Adobe PDF Visualizza/Apri
Pubblicazioni consigliate

Licenza Creative Commons
I metadati presenti in IRIS UNIMORE sono rilasciati con licenza Creative Commons CC0 1.0 Universal, mentre i file delle pubblicazioni sono rilasciati con licenza Attribuzione 4.0 Internazionale (CC BY 4.0), salvo diversa indicazione.
In caso di violazione di copyright, contattare Supporto Iris

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1066209
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact