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Announcing High Prices to Deter Innovation
Price announcements—similar to the ones made by tech firms at media events—are effective in deterring innovation. By announcing (and setting) a high price, a firm increases its rivals’ short-run profits, reducing the rival firms’ incentives to innovate by magnifying their Arrow’s replacement effect. We show that the equilibrium prices are greater and research and development (R&D) investments lower relative to when price announcements cannot be used strategically. We call this the R&D deterrence effect of price and show that it induces equilibrium prices that may exceed the multiproduct monopoly prices and even dissipate the consumer benefits of innovation.
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