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.