ENTRY DETERRENCE AND LIMIT PRICING UNDER ASYMMETRIC INFORMATION ABOUTCOMMON COSTS

A model with one incumbent and one entrant is analyzed, where the incu mbent has better information about the reservation price of the seller s of the input. If there are only two different reservation prices, th en limit pricing deters entry completely. If the entry fee is not too low. For low values of the entry fee, entry is deterred with a positiv e probability. Limit pricing takes the form in which both input and ou tput prices tend to be higher than under complete information. The adv erse effect of limit pricing on consumers' welfare is therefore somewh at clearer than in the ''classical'' limit pricing models. If there is a continuum of possible reservation prices, then entry is completely deterred in all pure strategy perfect Bayesian equilibria. (C) 1994 Ac ademic Press, Inc.