Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand

A model is constructed in which a potential entrant uses prices to make inferences about industry conditions. Stochastic demand shocks occur after the incumbent firm's action, so that prices reveal only statistical information about the incumbent's private information. The equilibrium diff...

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Bibliographic Details
Published in:Econometrica 1983-07, Vol.51 (4), p.981-996
Main Authors: Matthews, Steven A., Mirman, Leonard J.
Format: Article
Language:English
Subjects:
Conditional probabilities
Cost of entry
Costs
Credible threats
Economic theory
Equilibrium
Mathematical theorems
Monopoly
Noise
Price supports
Prices
Pricing
Profitability
Profits
Random variables
Self confirming equilibrium
Signal noise
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Summary:A model is constructed in which a potential entrant uses prices to make inferences about industry conditions. Stochastic demand shocks occur after the incumbent firm's action, so that prices reveal only statistical information about the incumbent's private information. The equilibrium differs from standard signalling equilibria in that it can be unique, it depends on prior beliefs, and it is rich in comparative statics. Conditions are obtained for entry threats to result in limit pricing, lower entry probabilities, and lower expected profits for potential entrants.
ISSN:0012-9682
1468-0262
DOI:10.2307/1912047