The paper by Paul Milgrom and John Roberts explores the concept of limit pricing, where an established firm sets prices below the monopoly level to deter potential entrants. The authors argue that if both the established firm and the entrant have incomplete information, limit pricing can emerge as a Nash equilibrium. Specifically, the established firm can signal its costs through its pre-entry price, which the entrant can use to infer the firm's costs and adjust its entry decision. The probability of entry in such an equilibrium may be lower, the same, or even higher than in a scenario with complete information. The authors present a game-theoretic model to illustrate these points, considering both linear demand and constant unit costs, and a more general model with a continuum of cost levels. They conclude that limit pricing can be beneficial for society, as it leads to lower prices without necessarily deterring entry, and suggest that public policy should not discourage limit pricing under these conditions.The paper by Paul Milgrom and John Roberts explores the concept of limit pricing, where an established firm sets prices below the monopoly level to deter potential entrants. The authors argue that if both the established firm and the entrant have incomplete information, limit pricing can emerge as a Nash equilibrium. Specifically, the established firm can signal its costs through its pre-entry price, which the entrant can use to infer the firm's costs and adjust its entry decision. The probability of entry in such an equilibrium may be lower, the same, or even higher than in a scenario with complete information. The authors present a game-theoretic model to illustrate these points, considering both linear demand and constant unit costs, and a more general model with a continuum of cost levels. They conclude that limit pricing can be beneficial for society, as it leads to lower prices without necessarily deterring entry, and suggest that public policy should not discourage limit pricing under these conditions.