Strategic Effects of Investment and Private Information: The Incumbent’s Curse

Luigi Brighi () and Marcello D'Amato

Center for Economic Research (RECent) from University of Modena and Reggio E., Dept. of Economics "Marco Biagi"

Abstract: We study a two-period entry model where the incumbent, privately informed about his cost of production, makes a long run investment choice along with a pricing decision. Investment is costreducing and its effects are assumed to differ across incumbent’s types, as a result investment plays a double role as a commitment variable and, along with price, as a signal. We ask whether and how investment decisions allow the incumbent to limit entry into the market. We find that the incumbent will never undertake strategic investment to deter profitable entry, because when incumbent’s costs are private information the signaling role of investment cancels out its value of commitment.

Keywords: Entry deterrence; commitment; limit pricing; multiple signaling (search for similar items in EconPapers)
JEL-codes: D58 L51 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:mod:recent:134

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