STRATEGIC ENTRY DETERRENCE IN GAMES OF INCOMPLETE INFORMATION (LIMIT PRICING, ENTRY BARRIERS, OLIGOPOLY THEORY)

This dissertation investigates the effect on firm behavior, industry structure, and social welfare when incumbent firms have private information, unavailable to potential entrants, on the production technology. Of primary interest is whether incumbent firms can set pre-entry price so as to deter entry which would have occurred under complete information. This research is then a contribution to the literature on limit pricing. A principle result of the literature is that entry is prevented by setting a relatively low price. Our results show the contrary. It is a high price which reduces expected post-entry profits and thus deters entry. The welfare effects of asymmetric information are then potentially substantial in that price is higher and there are fewer firms in the industry.; Drawing from recent work by Paul Milgrom and John Roberts (Econometrica, March 1982), our approach is to model the industry as a noncooperative repeated game where the value of an industry-specific cost parameter is private information to incumbent firms. We first analyze a game with two players; a monopolist and a potential entrant. The model is then extended to allow the initial industry structure to be a noncooperative oligopoly. In the final case, several potential entrants are assumed to exist in a model of sequential entry.; In equilibrium, the monopolist, for some values of the cost parameter, optimally restricts output below the simple monopoly rate in order to prevent entry. The resulting high price signals to the potential entrant that this is a high cost industry, and therefore, entry is unprofitable. This strategic behavior reduces the steady state number of firms relative to when there is complete information.; These qualitative results are confirmed when we allow for several incumbent firms and then several potential entrants. For the first time, strategic entry deterrence is generated when incumbent firms are noncooperative. It is further observed, in the sequential entry model, that price is higher even when entry occurs as the incumbent firm acts to prevent future entry. This is an additional source of welfare loss not found in the two preceding models.