Limit Pricing through Entry Regulation

This paper is about limit pricing under complete information and endogenous market demands. If pre-entry and post-entry market demands are correlated, then limit pricing can be an equilibrium strategy under complete information without government intervention. Furthermore, with government intervention, limiting entry via government dominates self-limiting strategy for the incumbent monopolist. The entry regulation by the benevolent government to prevent excess entry is exploited by the incumbent as a way to protect monopoly position. As a result, the social welfare with entry regulation is lower than under pure market equilibrium. The idea of this paper is general enough to be applied to other dynamic models of sequential entry like a location model of product differentiation.