Huric Larsen, Jesper Fredborg (2012): Pricing behaviour at capacity constrained facilities.
Download (141kB) | Preview
Entry of new firms can be difficult or even impossible at capacity constrained facilities, despite the actual cost of entering is low. Using a game theoretic model of incumbent firms’ pricing behaviour under these conditions, it is found that under the assumption of Bertrand competition and firms having different costs, the optimal pricing behaviour imply price stickiness and upward pricing. The findings further suggest a competitive behaviour of incumbents of disposing weaker opponents only if, it leads to weaker competitors entering the market and to use weaker opponents to shelter the incumbent. The results propose a new explanation of the mixed empirical findings on incumbent pricing to entry and suggest that competition authorities should use an effect-based approach to detect the behaviour.
|Item Type:||MPRA Paper|
|Original Title:||Pricing behaviour at capacity constrained facilities|
|Keywords:||Pricing behaviour; capacity constrained; congestion; game theory; competition policy; regulation; games of incomplete and asymmetric information; Bayesian equilibrium|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms
D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection
|Depositing User:||Jesper Fredborg Huric Larsen|
|Date Deposited:||11. Jun 2012 02:00|
|Last Modified:||09. May 2015 02:33|
AKZO, 1991. Judgment of the Court (Fifth Chamber) of 3 July 1991. - AKZO Chemie BV v Commission of the European Communities. - Article 86 - Eliminatory practices of a dominant undertaking. - Case C-62/86.
Bain, J.S., 1949. A Note on Pricing in Monopoly and Oligopoly. American Economic Review, 39, 448-464.
Baumol, W., Panzar, J.C., Willig, R.D., 1988. Contestable Markets and the Theory of Industry Structure. Revised edition, London Academic Press.
Bernheim, B.D., Whinston, M.D., 1990. Multimarket Contact and Collusive Behaviour. Rand Journal of Economics, 21, 1-26.
Borenstein, S., 1990. Airline Mergers, Airport Dominance, and Market Power. American Economic Review, 80, 400-404.
Borenstein, S., 1989. Hubs and high fares: dominance and market power in the U.S. airline industry. Rand Journal of Economics, 20(3), 344-365.
Cairns, R.D., Galbraith, J.W., 1990. Artificial Compatibility, Barriers to Entry, and Frequent – Flyer Programs. Canadian Journal of Economics, 23(4), 807-16.
Commission, 2005. DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses. European Commission, DG Competition, Brussels, December 2005.
Cooper D., Garvin S., Kagel J., 1997. Signalling and adaptive learning in an entry limit pricing game. Rand Journal of Economics, 28, 662–683.
Dixit, A., 1980. The Role of Investment in Entry deterrence. Economic journal, 90, 95-105.
Frank, R, Salkever, D., 1997. Generic Entry and the Pricing of Pharmaceuticals. Journal of Economics and Management Strategy, 6, 75-90.
Geroski, P., 1995. What do we know about entry? International Journal of Industrial Organisation, 13, 421-440.
Gilbert, R.J., 1989. The Role of Potential Competition in Industrial Organization. The Journal of Economic Perspectives, 3(3), 107-127.
Harsanyi, J., 1967-68. Games with Incomplete Information played by ‘Bayesian’ Firms; Parts I-III. Management Science, 14, 159-182, 320-334, 486-502.
Joskow, A., 1994. Entry, Exit, and Performance in Airline Markets. International Journal of Industrial Organization, 12, 457-471.
Klemperer, P., 1987. Markets with Consumer Switching Costs. The Quarterly Journal of Economics, 102(2), 375-394.
Kreps, D. M., Wilson, R., 1982. Reputation and Imperfect Information. Journal of Economic Theory, 27(2), 253-79.
Lieberman, R.B., 1987. Strategies for capacity expansion. Sloan Management Review, Summer 1987, 19-25.
Milgrom, P., Roberts, J., 1982. Limit Pricing and Entry under Incomplete Information: An equilibrium Analysis. Econometrica, 50, 443-460.
Modigliani, F., 1958. New developments on the Oligopoly Front. Journal of Political Economy, 66, 215-232.
Osborne, M.J., Rubinstein, A. 1998. A Course in Game Theory. The MIT Press, 5th printing.
Perloff, J., Salop, S., 1985. Equilibrium with Product Differentiation. The Review of Economic Studies, 52(1), 107-120.
Rosenthal, R. 1980. A Model in which an Increase in the Number of Sellers Leads to a Higher Price. Econometrica, 48(6), 1575-1579.
Simon, D., 2005. Incumbent pricing responses to entry. Strategic Management Journal, 26(13), 1229-1248.
Smiley, R., 1988. Empirical Evidence on Strategic Entry Deterrence. International Journal of Industrial Organization, 6, 167-180.
Spence, M., 1977. Entry, Capacity, Investment and Oligopolistic Pricing. Bell Journal of Economics, 8, 534-544.
Sylos-Labini, S., 1962. Oligopoly and Technical progress. Harvard University Press: Cambridge, MA.
Larsen, J.F., Storm, S., 2002. Flybonusprogrammer som et konkurrencebegrænsende element mellem luftfartsselskaberne i Europa. Nationaløkonomisk Tidsskrift, 140, 167-184.
Windle, R., Dresner, M., 1995. Competitive Responses to Low Cost Carrier Entry. Transportation Research: Part E: Logistics and Transportation Review, 35, 59-75.
Yamawacki, H., 2002. Price Reactions to New Competition: A study of the U.S. Luxury Car Market, 1986-1997. International Journal of Industrial Organization, 20, 19-39.