Dynamic Market Strategy Under Threat of Competitive Entry: An Analysis of the Pricing and Production Policies Open to the Multinational Company

Abstract

THERE is extensive evidence indicating that firms price discriminatorily over their market areas, where price discrimination is defined to exist when pattern of delivered prices departs from that which would be generated by f.o.b. pricing: see Greenhut, Greenhut and Li [8], Hwang [10], Phlips [16]. Underlying this evidence is an equally extensive body of theory which attempts to explain why such discriminatory pricing rules should be adopted, both in competitive and monopolistic markets: see Capozza and van Order [3], Greenhut and Greenhut [7], Norman [15]. One limitation of this theory is that it is essentially static. Even when competitive reactions and interdependencies are introduced there is no truly dynamic analysis. Rather, theory concentrates on comparing long-run equilibria with, perhaps, some limited comment on how those equilibria might be achieved. The analysis of price changes over time has received some attention, notably by Gaskins [6], Jacquemin and Thisse [11], and Phlips [17]. In these cases, however, analysis is spaceless. While some analogies are drawn between intertemporal and spatial price discrimination, these analogies are inevitably weak. The major objective of this paper is to treat spatial and temporal problems simultaneously. We ask whether pricing rules and market choice of a firm operating over a spatially extensive market area will vary when it is placed in a dynamic setting. In particular, we investigate pricing behaviour of a to which we shall refer as the leading firm, when it is subject to threat of competitive entry in certain of its markets. Our model owes much to analysis by Gaskins [6] but we show that Gaskins' analysis applies to only part of spatial market area once we allow for costs of distance. In particular, we show that if firm enjoys a substantial long-run cost advantage in particular markets' it will adopt a pricing rule identical to that derived in static, monopolistic case. This can be expected to be a very