International Journal of Business and Economics Volume 9, No. 3 December, 2010

Limit-Pricing and Learning-By-Doing: A Dynamic Game with Incomplete Information

Ke Yang

Barney School of Business, University of Hartford, U.S.A.

Abstract

We study a firm's pricing/output strategy under threat of entry in a two-period game with asymmetric information, where the firm can reduce future cost through learning-by-doing. In contrast with previous literature, we show that a firm's incentive to reduce cost through higher production may not align with its incentive to signal its cost type. As a consequence, in equilibrium, the incumbent firm might distort its price upward instead of downward.

Keywords：limit-pricing, learning-by-doing, dynamic game.

JEL Classifications：L11, L12, L13.

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