Threat of Entry, Asymmetric Information and Pricing
50 Pages Posted: 19 Oct 2008 Last revised: 5 Jun 2013
Date Written: November 22, 2011
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.
Keywords: entry, information economics, price, incumbent response, cable TV
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