A Modelof Competitive Limit Pricing


  • Helpful discussions with Laurie Bagwell, Mort Kamien, Garey Ramey, Mike Riordan, Bill Rogerson, Dan Spulber, and Asher Wolinsky are gratefully acknowledged. The comments of an anonymous referee are particularly appreciated. I am also grateful to the Hoover Institution for financial support.


This paper offers a new theory of limit pricing. Incumbents from different markets or regions “compete” against one another, with each attempting to price in a manner that deflects entry into the others' markets. An entrant is imperfectly informed as to the incumbents' respective investments in cost reduction and seeks to enter markets in which incumbents have high costs. In a focal equilibrium, the entrant uses a simple “comparison strategy,” in which it enters only the highest-priced markets, and incumbents engage in limit-pricing behavior. The influence on pricing of the number of markets and the scope of entry is also reported. Throughout, the central feature of the analysis is that an incumbent's price affects its investment incentives, with lower prices being complementary to greater investment.