Financial Signalling and the "Deep-Pocket" Argument

Michel Poitevin

RAND Journal of Economics, 1989, vol. 20, issue 1, 26-40

Abstract: This article provides a formal representation of Telser's (1966) "deep-pocket" argument by considering a model in which the entrant's and the incumbent's financial structures are endogenous. The entrant's financial vulnerability may be explained by informational asymmetries in financial markets. Financiers are uncertain of the entrant's true value, but they know the incumbent's true worth. Both firms have to finance a fixed expenditure before starting production. In equilibrium the incumbent finances with equity, while the high-value entrant comes into the market heavily leveraged compared with the incumbent. This provides an incentive for the incumbent to engage in predatory practices such as a price war to exhaust the entrant financially and cause his bankruptcy.

Date: 1989
References: Add references at CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
http://links.jstor.org/sici?sici=0741-6261%2819892 ... O%3B2-P&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
Working Paper: Financial Signalling and the "Deep Pocket" Argument (1987)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rje:randje:v:20:y:1989:i:spring:p:26-40

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Bibliographic data for series maintained by ().