Undercut-Proof Subgame Perfect Equilibrium of a Pricing Game

Two firms selling a homogenous product to two types of buyers are involved in a sequential pricing game with zero costs. The pricing strategy available involves a fixed price and a royalty. It is shown that there exists a unique subgame perfect equilibrium with positive profits to both firms if and only if buyers differ significantly in their willingness to pay. In particular, the incumbent sets a positive royalty and sells to the low demand buyer while the entrant only charges a fixed price and sells to the high demand buyer, resulting in an undercut-proof subgame perfect equilibrium

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Year of publication:	2012
Authors:	Datta, Debabrata
Other Persons:	Roy, Jaideep (contributor)
Publisher:	[2012]: [S.l.] : SSRN
Subject:	Spieltheorie \| Game theory \| Preismanagement \| Pricing strategy \| Preiswettbewerb \| Price competition
Description of contents:	Abstract [papers.ssrn.com] ; Abstract [doi.org]