Signalling Strength: Limit Pricing and Predatory Pricing

This article merges two areas of strategic pricing theory. A dynamic signalling game with two-sided uncertainty is presented in which an incumbent is confronted with potential entry and chooses between limit pricing and predatory pricing as a means of achieving or maintaining monopoly profit. Initial distributions across player types are pivotal to this decision. Results show that when the incumbent is likely to be strong relative to the entrant, predatory pricing is chosen. When the incumbent is likely to be weak relative to the entrant, limit pricing is chosen. For intermediate cases a strong incumbent may choose a combination of these two signalling strategies.