Oligopoly Limit-Pricing in the Lab
TILEC Discussion Paper 2006-013
41 Pages Posted: 12 Jul 2006
Date Written: June 2006
We examine the behavior of senders and receivers in the context of oligopoly limit pricing experiments in which high prices chosen by two privately informed incumbents may signal to a potential entrant that the industry-wide costs are high and that entry is unprofitable. The results provide strong support for the theoretical prediction that the incumbents can credibly deter unprofitable entry without having to distort their prices away from their full information levels. Yet, in a large number of cases, asymmetric information induces incumbents to raise prices when costs are low. The results also show that the entrants' behavior is by and large bi-polar: entrants tend to enter when the incumbents' prices are low but tend to stay out when the incumbents' prices are high.
Keywords: oligopoly limit pricing, multi-sender signalling, full information equilibrium
JEL Classification: C72, C91
Suggested Citation: Suggested Citation