Signalling for entry : limit pricing and reciprocal entry

In this paper we enrich the Brabander (1981) and Brander and Krugman (1983) model of reciprocal entry by placing it i a setting of two-sided asymetric information. Following the limit pricing methodology of Milgrom and Roberts (1982), we show that the limit price is affected by a firm''s desire to deter entry and to increase its market share in the target country. Contrary to Mailath (1989) we see the existence of pooling equilibria and hence, high cost incumbents may be able to exploit asymmetric information in order to improve their market share. Hence,signallling for entry may arise even in the pooling equilibrium. As the number of markets and firms (n) increases, the limit price may rise or fall depending on a priori beliefs. Indeed, negative prices might emerge and hence the equilibrium fails. Nevertheless, pricing below marginal cost can exist as an equilibrium strategy. Furthermore, we see that as n increases, the range of discount factors that support the pooling equilibrium falls for the low cost incumbent but rises for the high cost incumbent.