Is limit pricing evolutionarily stable?

Ugur Soytas, Klaus G. Becker

Research output: Contribution to journalReview article

2 Scopus citations

Abstract

We have analyzed the question whether or not limit-pricing behavior can be viewed as a strategy, which survives the replicator dynamics in a game in which firms change strategies through imitation. Our results show that, regardless of the proportion of low cost incumbents in the population, potential entrants that play the strategy "enter" when they observe limit output are wiped out. The unique ESS consists of all low cost incumbents playing the "limit output" strategy, and all high cost incumbents playing the "monopoly output". This ESS includes potential entrants playing "stay out" after observing the limit output, and playing "enter" if monopoly output is observed in the first stage. Hence, limit pricing survives the replicator dynamics and appears in the stable state of the population.

Original languageEnglish
Pages (from-to)281-288
Number of pages8
JournalJournal of Evolutionary Economics
Volume13
Issue number3
DOIs
StatePublished - Aug 1 2003

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Keywords

  • ESS
  • Limit pricing
  • Replicator dynamics

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