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A Model of Dynamic Limit Pricing with an Application to the Airline Industry

Christopher GedgeJames W. RobertsAndrew Sweeting

出版	National Bureau of Economic Research, 2014
URL	http://books.google.com.hk/books?id=eVa4oQEACAAJ&hl=&source=gbs_api

註釋The one-shot nature of most theoretical models of strategic investment, especially those based on asymmetric information, limits our ability to test whether they can fit the data. We develop a dynamic version of the classic Milgrom and Roberts (1982) model of limit pricing, where a monopolist incumbent has incentives to repeatedly signal information about its costs to a potential entrant by setting prices below monopoly levels. The model has a unique Markov Perfect Bayesian Equilibrium under a standard form of refinement, and equilibrium strategies can be computed easily, making it well suited for empirical work. We provide reduced-form evidence that our model can explain why incumbent airlines cut prices when Southwest becomes a potential entrant into airport-pair route markets, and we also calibrate our model to show that it can generate the large price declines that are observed in the data.