Natural monopoly and differential pricing

Marcel Canoy*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.

Original languageEnglish
Pages (from-to)287-309
Number of pages23
JournalJournal of Economics Zeitschrift für Nationalökonomie
Volume59
Issue number3
DOIs
Publication statusPublished - Oct 1994
Externally publishedYes

Bibliographical note

Copyright:
Copyright 2007 Elsevier B.V., All rights reserved.

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