Entry deterrence by cheap talk

Jeong-Yoo Kim

Bulletin of Economic Research, 2022, vol. 74, issue 2, 569-578

Abstract: The conventional wisdom is that an incumbent can deter the rival firm's entry by costly limit pricing but cannot deter entry by a costless signal, so‐called cheap talk. In this short paper, we show that an incumbent can deter entry of a potential competitor by cheap talk if there is another potential entrant producing complementary goods. In equilibrium, which is partially revealing, the incumbent can use publicly observable cheap talk that can deter entry of the rival firm with some positive probability.

Date: 2022
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