Undercut-Proof Subgame Perfect Equilibrium of a Pricing Game

Posted: 21 Mar 2011

See all articles by Debabrata Datta

Debabrata Datta

University of Calcutta

Jaideep Roy

Deakin University - Department of Economics

Date Written: April 10, 2001

Abstract

Two firms selling a homogenous product to two types of buyers are involved in a sequential pricing game with zero costs. The pricing strategy available involves a fixed price and a royalty. It is shown that there exists a unique subgame perfect equilibrium with positive profits to both firms if and only if buyers differ significantly in their willingness to pay. In particular, the incumbent sets a positive royalty and sells to the low demand buyer while the entrant only charges a fixed price and sells to the high demand buyer, resulting in an undercut-proof subgame perfect equilibrium.

Keywords: Sequential Pricing, Fixed Price, Royalty, Undercut-proof Subgame Perfect Equilibrium Situation

JEL Classification: C73, D43, L13

Suggested Citation

Datta, Debabrata and Roy, Jaideep, Undercut-Proof Subgame Perfect Equilibrium of a Pricing Game (April 10, 2001). University of Copenhagen Dept. of Economics Discussion Paper No. 01-04, Available at SSRN: https://ssrn.com/abstract=1791707 or http://dx.doi.org/10.2139/ssrn.1791707

Debabrata Datta

University of Calcutta

Kolkata
West Bengal
India

Jaideep Roy (Contact Author)

Deakin University - Department of Economics ( email )

Australia

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