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Signalling Strength: Limit Pricing and Predatory Pricing

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  • Greg LeBlanc

Abstract

This article merges two areas of strategic pricing theory. A dynamic signalling game with two-sided uncertainty is presented in which an incumbent is confronted with potential entry and chooses between limit pricing and predatory pricing as a means of achieving or maintaining monopoly profit. Initial distributions across player types are pivotal to this decision. Results show that when the incumbent is likely to be strong relative to the entrant, predatory pricing is chosen. When the incumbent is likely to be weak relative to the entrant, limit pricing is chosen. For intermediate cases a strong incumbent may choose a combination of these two signalling strategies.

Suggested Citation

  • Greg LeBlanc, 1992. "Signalling Strength: Limit Pricing and Predatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 493-506, Winter.
    • Handle: RePEc:rje:randje:v:23:y:1992:i:winter:p:493-506
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    Cited by:

    1. Granero, Lluís M. & Ordóñez-de-Haro, José M., 2015. "Entry under uncertainty: Limit and most-favored-customer pricing," Mathematical Social Sciences, Elsevier, vol. 76(C), pages 1-11.
    2. Flavio Toxvaerd, 2017. "Dynamic limit pricing," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 281-306, March.
    3. Starkov, Egor, 2023. "Only time will tell: Credible dynamic signaling," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    4. Kalevi Dieke, Alex & Junk, Petra & Thiele, Sonja & Zauner, Martin, 2012. "Kostenstandards in der Ex-Post-Preiskontrolle im Postmarkt," WIK Discussion Papers 368, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    5. Utaka, Atsuo, 2008. "Pricing strategy, quality signaling, and entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 878-888, July.
    6. Søren Johansen & Anders Ryghn Swensen, 2021. "Adjustment coefficients and exact rational expectations in cointegrated vector autoregressive models," CREATES Research Papers 2021-10, Department of Economics and Business Economics, Aarhus University.
    7. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    8. Segendorff, Björn, 1995. "The Telecommunication Market: A Survey of Theory and Empirics," Working Paper Series 442, Research Institute of Industrial Economics.

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