Limit Pricing with Incomplete Information: Answers to Frequently Asked Questions

Abstract

Strategic pricing is an important and exciting topic in industrial organization and the economics of strategy. A wide range of texts use what has become a standard version of the Milgrom and Roberts (1982a) limit-pricing model to convey the essential ideas of strategic pricing under incomplete information. In addition to providing a formal, but succinct, review of the standard model, the author addresses three questions that commonly arise when the model is presented to students: What happens if there are more than two periods. What if information is still incomplete in the postentry subgame. What if the incumbent does not know the entrant's beliefs. The author shows that, although there are some interesting behavioral implications, none of these extensions significantly changes the conclusions of the basic model.

Keywords:

• entry deterrence
• limit pricing
• strategic behavior