Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, September 11, 2014

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

Christopher Gedge, James W. Roberts and Andrew Sweeting theorize A Model of Dynamic Limit Pricing with an Application to the Airline Industry.

ABSTRACT: 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.

https://lawprofessors.typepad.com/antitrustprof_blog/2014/09/a-model-of-dynamic-limit-pricing-with-an-application-to-the-airline-industry.html

| Permalink

TrackBack URL for this entry:

https://www.typepad.com/services/trackback/6a00d8341bfae553ef01a511ef9798970c

Listed below are links to weblogs that reference A Model of Dynamic Limit Pricing with an Application to the Airline Industry:

Comments

Post a comment