A SIGNALING MODEL OF PREDATORY PRICING

Abstract

Predatory pricing involves pricing lower in the presence of competition than would otherwise be o ptimal in order to deter entry, induce exit, or discipline (reduce the future ou tput of) a rival. Signalling of private information about market conditions thro ugh price can give rise to predation aimed at the latter two objectives. However , in separating equilibrium, no extra exit or output reduction is induced relati ve to the full information benchmark. Nevertheless, such predation is not innocu ous, because the expectation of its occurrence may reduce entry. Copyright 1986 by Royal Economic Society.

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