Undercut-proof Subgame Perfect Equilibrium of a Pricing Game

Debabrata Datta and Jaideep Roy

No 01-04, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: Two firms selling a homogenous product to two types of buyers are involved in a sequential pricing game with zero costs. The pricing strategy available involves a fixed price and a royalty. It is shown that there exists a unique subgame perfect equilibrium with positive profits to both firms if and only if buyers differ significantly in their willingness to pay. In particular, the incumbent sets a positive royalty and sells to the low demand buyer while the entrant only charges a fixed price and sells to the high demand buyer, resulting in an undercut-proof subgame perfect equilibrium.

Keywords: Sequential Pricing; Fixed Price; Royalty; Undercut-proof Subgame Perfect Equilibrium Situation (search for similar items in EconPapers)
JEL-codes: C73 D43 L13 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2001-04
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0104

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