Battles for market share: incomplete information, aggressive strategic pricing, and competitive dynamics

Abstract

In the last five years, economists have begun to apply the theory of games of incomplete information in extensive form to problems of industrial competition. As a result, we are beginning to get a theoretical handle on some aspects of the rich variety of behavior that marks real strategic interactions but that has previously resisted analysis. For example, the only theoretically consistent analyses of predatory pricing available five years ago indicated that such behavior was pointless and should be presumed to be rare; now we have several distinct models pointing in the opposite direction. These not only formalize and justify arguments for predation that had previously been put forward by business people, lawyers, and students of industrial practice; they also provide subtle new insights that call into question both prevailing public policy and legal standards and various suggestions for their reform. In a similar fashion, we now have models offering strategic, information-based explanations for such phenomena as price wars, the use of apparently uninformative advertising, limit pricing, patterns of implicit cooperation and collusion, the breakdown of bargaining and delays of agreement, the use of warranties and service contracts, the form of pricing chosen by oligopolists, the nature of contracts between suppliers and customers, and the adoption of various institutions for exchange: almost all of this was unavailable five years ago.