Limit-Pricing and Learning-By-Doing:A Dynamic Game with Incomplete Information

Abstract

We study a firm’s pricing/output strategy under threat of entry in a two-period game with asymmetric information, where the firm can reduce future cost through learning-bydoing. In contrast with previous literature, we show that a firm’s incentive to reduce cost through higher production may not align with its incentive to signal its cost type. As a consequence, in equilibrium, the incumbent firm might distort its price upward instead of downward.