Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis

Abstract

Limit pricing involves charging prices below the monopoly price to make new entry appear unattractive.If the entrant is a rational decision maker with complete information, pre-entry prices will not influence its entry decision, so the established firm has no incentive to practice limit pricing.However, if the established firm has private, payoff relevant information (e.g., about costs), then prices can signal that information, so limit pricing can arise in equilibrium.The probability that entry actually occurs in such an equilibrium, however, can be lower, the same, or even higher than in a regime of complete information (where no limit pricing would occur).'Much of the work reported here first appeared in [11].This work has been presented at a large number of conferences, meetings, and seminars, and we would like to thank our audiences at each of these events for their comments.We are particularly indebted to Eric Maskin, Roger Myerson, Steve Salop, Robert Wilson, and two referees for their helpful suggestions, to David Besanko for his excellent research assistance,