Strategic Pricing in Volatile Markets

55 Pages Posted: 17 Apr 2018 Last revised: 4 Apr 2019

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Aaron Kolb

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: April 2, 2019

Abstract

We study dynamic signaling in a game of stochastically evolving stakes. Our motivating example is dynamic limit pricing in markets with persistent demand shocks. An incumbent is privately informed about its costs, high or low, and can deter a potential entrant by setting prices strategically. The incumbent builds a reputation by maintaining low prices whenever the market reaches new lows and entry becomes a distant threat; equilibrium strategies thus exhibit path dependence, being functions of both the market's current size and its historical minimum. The model provides an explanation for rising prices in falling markets, which may have implications for antitrust policy. Variations of the model apply to predatory pricing and sovereign debt.

Keywords: limit pricing, predatory pricing, stochastic games, signaling, continuous time

JEL Classification: C73, D82, D83, L11

Suggested Citation

Gryglewicz, Sebastian and Kolb, Aaron, Strategic Pricing in Volatile Markets (April 2, 2019). Kelley School of Business Research Paper No. 18-28. Available at SSRN: https://ssrn.com/abstract=3154372 or http://dx.doi.org/10.2139/ssrn.3154372

Sebastian Gryglewicz (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Aaron Kolb

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

HOME PAGE: http://https://sites.google.com/site/aaronmkolb/

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