Dynamic limit pricing and internal finance (Q1081515)

This paper examines a model of dynamic limit pricing with a profit- maximizing fringe constrained to finance new investment from internal finance. In a differential game, the dominant firm controls price, thereby determining the current earnings of the fringe, while the fringe chooses its optimal retention ratio. If market growth is less than the discount rate, an important feature of the solution is that price must eventually drop to the fringe long-run cost of production. If market growth is initially rapid, the dominant firm is much more agressive in limiting fringe growth.