Entry Deterrence and Entry Inducement in an Industry with Complementary Products

This paper discusses the possibility of signal jamming between multiple informed incumbents with conflicting interests and examines the implication of the possibility in the limit pricing literature. I find fully separating equilibria where the incumbent competing against the entrant does not use limit pricing in an optimal response to “inductive pricing” by another incumbent desiring entry i.e., charging a lower price than the static equilibrium price to induce entry. Thus, contrary to Milgrom and Roborts, the consequences of asymmetric information for welfare are ambiguous even in fully separating equilibria. [L11]