Threat of Entry, Asymmetric Information and Pricing
New York University (NYU) - Leonard N. Stern School of Business
November 22, 2011
NET Institute Working Paper No. 08-13
This paper examines the impact of asymmetric information on incumbent firms’ propensity to engage in limit pricing when faced with threat of entry. I draw from information economics to argue that incumbents will use price to respond ex ante to entry in situations characterized by asymmetric information. I suggest two situations in which asymmetric information can arise: when potential entrants are from outside the primary industry and when incumbent firms are members of R&D consortia. I then study pricing in the US cable TV industry to show that pricing patterns of incumbent cable TV systems are consistent with limit pricing when the relationship between the incumbent and potential entrant is characterized by asymmetric information.
Number of Pages in PDF File: 50
Keywords: entry, information economics, price, incumbent response, cable TV
Date posted: October 19, 2008 ; Last revised: June 5, 2013
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