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Optimal pricing strategy for foreign market entry: a game theoretic approach
Author(s) -
Kim YoungHan,
Aggarwal Praveen,
Ha YoungMyung,
Cha Tai Hoon
Publication year - 2006
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1297
Subject(s) - distortion (music) , game theory , microeconomics , economics , signaling game , pricing strategies , quality (philosophy) , complete information , inference , strategic dominance , industrial organization , computer science , computer network , amplifier , philosophy , bandwidth (computing) , epistemology , artificial intelligence
Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.