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Dynamic limit pricing
Author(s) -
Toxvaerd Flavio
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12176
Subject(s) - limit (mathematics) , pooling , economics , monopoly , limit price , microeconomics , mathematical economics , econometrics , computer science , mathematics , price level , monetary economics , mathematical analysis , artificial intelligence
I study a multiperiod model of limit pricing under one‐sided incomplete information. I characterize pooling and separating equilibria and their existence and determine when these involve limit pricing. For some parameter constellations, the unique equilibrium surviving a D1 type refinement involves immediate separation on monopoly prices. For others, there are limit price equilibria surviving the refinement in which different types may initially pool and then (possibly) separate. Separation involves setting prices such that the inefficient incumbent's profits from mimicking are negative. As the horizon increases or as firms become more patient, limit pricing becomes increasingly difficult to sustain in equilibrium.