Final answer:
The major critique of early limit pricing models by game theorists is that the threat of charging the limit price after entry is not credible because it is not a sustainable strategy for the incumbent firm. This critique highlights issues like lack of incentive for maintaining limited pricing and the potential for asymmetric information or mistakes, which early models did not adequately address.
Step-by-step explanation:
A major critique of early limit pricing models by game theorists is that the threat of charging the limit price after entry is not credible. Limit pricing refers to the strategy where an incumbent firm sets the price low enough to deter entry by potential competitors. This assumes the incumbent would sustain the limit price even after entry occurs, which may not be a credible commitment due to the firm's incentive to increase prices once the threat has diminished.
One key issue with these early models is that they did not take into account the fact that actions and threats must be credible to influence the behaviour of potential entrants. If a firm threatens to lower prices after a competitor enters the market but would not benefit from doing so, that threat lacks credibility. Without credibility, potential entrants may disregard the threat, making the strategy of limit pricing ineffective.
In addition to credibility issues, early limit pricing theories did not fully account for situations where information may be asymmetric between firms or the potential for firms to make mistakes (“tremble”), both of which can impact market entry decisions. The refinement of game theory models over time has tried to address these critiques by incorporating concepts such as reputation, signalling, and the possibility that firms may act irrationally or make errors.
The critique points out that maintaining a limited price indefinitely is not a profitable strategy for the incumbent, and once a potential competitor realizes this, the entry-deterring effect of limit pricing vanishes, opening the market to competition despite the barriers to entry.