List pricing and discounting in a Bertrand–Edgeworth duopoly |
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Authors: | Antn García Díaz Roberto Hernn Gonzlez Praveen Kujal |
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Institution: | aDepartamento de Economía, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Spain;bDepartamento de Economía, Universidad Europea de Madrid, Calle Tajo, s/n, 28670 Villaviciosa de Odón, Spain |
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Abstract: | List, or retail, pricing is a widely used trading institution where firms announce a price that may be discounted at a later stage. Competition authorities view list pricing and discounting as a procompetitive practice. We modify the standard Bertrand–Edgeworth duopoly model to include list pricing and a subsequent discounting stage. Both firms first simultaneously choose a maximum list price and then decide whether to discount, or not, in a subsequent stage. We show that list pricing works as a credible commitment device that induces a pure strategy outcome. This is true for a general class of rationing rules. Further unlike the dominant firm interpretation of a price leader, the low capacity firm may have incentives to commit to a low price and in this sense assume the role of a leader. |
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Keywords: | List pricing Discounts Capacity constrained models Mixed strategies Pure strategies Stackelberg leader |
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