Limit Pricing under Complete Information: A Theoretical Analysis of Mobile network Operators

Hillary Ekisa Nambanga
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Hillary Ekisa Nambanga: School of International Trade and Economics, University of International Business and Economics (UIBE), Beijing, China

International Journal of Science and Business, 2020, vol. 4, issue 12, 115-122

Abstract: Limit pricing is a very interesting issue in industrial organization. This is a case where firms with market power, when faced with a threat of market entry, charge a very low price that is lower than their marginal cost for their products or services in order to prevent the entry of new potential competitors or prevent their smaller competitors from expanding their business. This they do to protect their market dominance. After successfully deterring entry, the incumbent firms then revert to charging higher prices. Previous theoretical studies show that this strategy is viable in the presence of information asymmetry. Competition Authorities and other regulatory agencies treat limit pricing as anti-competitive and illegal. This research paper theoretically analyses limit pricing among telecommunications companies by way of linear demand equations within an oligopoly framework involving one dominant incumbent and fringe firms under complete information. The analysis proves that dominant firms can use their market power to engage in limit pricing in the absence of information asymmetry concerning the true operating costs among the incumbents. This finding is of great help to Competition Authorities and other policy makers in ensuring that dominant firms do not abuse their market power. This ensures fair competition among all the market players irrespective of their market share.

Keywords: Limit Pricing; Complete Information; Dominant firms; Fringe firms; Entry deterrence (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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