List pricing and discounting in a Bertrand-Edgeworth duopoly

García Díaz, Antón, Hernán-González, Roberto and Kujal, Praveen (2009) List pricing and discounting in a Bertrand-Edgeworth duopoly. International Journal of Industrial Organization, 27 (6). pp. 719-727. ISSN 0167-7187

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Abstract

List, or retail, pricing is a widely used trading institution where firms announce a price that may be discounted at a later stage. Competition authorities view list pricing and discounting as a procompetitive practice. We modify the standard Bertrand–Edgeworth duopoly model to include list pricing and a subsequent discounting stage. Both firms first simultaneously choose a maximum list price and then decide whether to discount, or not, in a subsequent stage. We show that list pricing works as a credible commitment device that induces a pure strategy outcome. This is true for a general class of rationing rules. Further unlike the dominant firm interpretation of a price leader, the low capacity firm may have incentives to commit to a low price and in this sense assume the role of a leader.

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