Jorge Tarziján

Limit pricing with complementary goods

Purpose – This paper aims to examine the equilibrium limit price charged by a producer trying to deter the entry of a firm that can choose one of the two markets of complementary goods.Design/methodology/approach – The authors model a dynamic game of incomplete information solved using a “perfect Bayesian equilibrium” approach.Findings – It is shown that an incumbent will be willing to spend more resources – i.e. charge a lower limit price – to deter entry into its market as products become more complementary. This is because additional benefits are gained from entry deterrence by facing a more competitive market in the complementary product. The additional benefits of entry deterrence are shown to be a function of the degree of complementarity between goods.Practical implications – A managerial implication of this article is that firms are willing to compete more fiercely to send an entrant to the others incumbent market as the degree of complementarity between goods increases. An interesting conclusion...