Is limit pricing evolutionarily stable?

Soytas U., Becker K.

JOURNAL OF EVOLUTIONARY ECONOMICS, vol.13, no.3, pp.281-288, 2003 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 13 Issue: 3
  • Publication Date: 2003
  • Doi Number: 10.1007/s00191-003-0154-z
  • Journal Name: JOURNAL OF EVOLUTIONARY ECONOMICS
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.281-288
  • Middle East Technical University Affiliated: Yes

Abstract

We have analyzed the question whether or not limit-pricing behavior can be viewed as a strategy, which survives the replicator dynamics in a game in which firms change strategies through imitation. Our results show that, regardless of the proportion of low cost incumbents in the population, potential entrants that play the strategy "enter" when they observe limit output are wiped out. The unique ESS consists of all low cost incumbents playing the "limit output" strategy, and all high cost incumbents playing the "monopoly output". This ESS includes potential entrants playing "stay out" after observing the limit output, and playing "enter" if monopoly output is observed in the first stage. Hence, limit pricing survives the replicator dynamics and appears in the stable state of the population.