Econometrica: May, 1971, Volume 39, Issue 3

Limit Pricing and Uncertain Entry

https://doi.org/0012-9682(197105)39:3<441:LPAUE>2.0.CO;2-P
p. 441-454

Morton I. Kamien, Nancy L. Schwartz

The situation in which a seller is aware that his pricing policy will affect the probability of entry of competing suppliers is studied. The seller's optimal price policy is developed under the assumption that the entry probability is a non-decreasing function of product price and that the objective is present value maximization. It is shown that the optimal pare-entry price tends to fall as the discount rate drops, the market growth rate rises, the post-entry profit possibilities decline, or certain non-price barriers to entry fall.