Optimal pricing strategy for foreign market entry: a game theoretic approach

Young-Han Kim (), Praveen Aggarwal, Young-Myung Ha and Tai Hoon Cha
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Praveen Aggarwal: Department of Marketing, University of Minnesota Duluth, 412 Library Drive, Duluth, MN 55812, USA, Postal: Department of Marketing, University of Minnesota Duluth, 412 Library Drive, Duluth, MN 55812, USA
Young-Myung Ha: Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea, Postal: Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea
Tai Hoon Cha: Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea, Postal: Department of Business Administration, Hankuk University of Foreign Studies, 270 Imun-Dong, Dongdaemun-Koo, Seoul, 130-791, Korea

Managerial and Decision Economics, 2006, vol. 27, issue 8, pages 643-653

Abstract: Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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