Entry-Deterring Nonlinear Pricing with Bounded Rationality

Dawen Meng and Guoqiang Tian

MPRA Paper from University Library of Munich, Germany

Abstract: This paper considers an entry-deterring nonlinear pricing problem faced by an incumbent firm of a network good. The analysis recognizes that the installed user base/network of incumbent monopolist has preemptive power in deterring entry if the entrant’s good is incompatible with the incumbent’s network. This power is, however, dramatically weakened by the bounded rationality of consumers in the sense that it is vulnerable to small pessimistic forecasting error when the marginal cost of entrants falls in some medium range. These findings provide a formal analysis that helps reconcile two seemingly contrasting phenomena: on one hand, it is very difficult for a new, incompatible technology to gain a footing when the product is subject to network externalities; on the other hand, new technologies may frequently escape from inefficient lock-in and supersede the old technologies even in the absence of backward incompatibility. Our results therefore shed light on how the market makes transition between incompatible technology regimes.

Keywords: Nonlinear pricing; Entry deterrence; Network Externalities; Bounded rationality (search for similar items in EconPapers)
JEL-codes: D42 D62 D82 (search for similar items in EconPapers)
Date: 2013-08, Revised 2014-05
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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