Limit Pricing under Third-Degree Price Discrimination

Resumo / Abstract:

We consider an incumbent who operates in two independent markets and has private information about his production cost. In one of the markets, there is a potential entrant offering a differentiated product. The most reasonable perfect bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. The equilibrium may involve a downward distortion in both markets pre-entry prices. This distortion is increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a sufficient condition for the existence of entry deterrence in the foreign market.

Palavras-Chave / Keywords: Entry Deterrence, Product Differentiation, Asymmetric Information, Discriminatory Pricing.

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