Entry with Two Correlated Signals

Alex Barrachina (), Yair Tauman () and Amparo Urbano

No 2015/14, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: We analyze the effect of industrial espionage on limit-pricing models. We consider an incumbent monopolist engaged in R&D trying to reduce his cost of production and deter a potential entrant from entering the market. The R&D project may be successful or not and its outcome is a private information of the incumbent. The entrant has an access to an Intelligence System (IS hereafter) of a certain precision that generates a noisy signal on the outcome of the R&D project, and she decides whether to enter the market based on two signals: the price charged by the incumbent and the signal sent by the IS. It is assumed that the precision of the IS is exogenous and common knowledge. Our fundamental result is that for intermediate values of the IS precision, the set of pooling equilibria is non-empty even with profitable entry and the entrant enters if the IS tells her the R&D project was not successful. Since in the classical limit- pricing models the entrant never enters in a pooling equilibrium, the use of the IS by the entrant increases competition in pooling equilibrium with high probability. Moreover, the incumbent can deter profitable entry with positive probability.

Keywords: Espionage; Entry deterrence; Asymmetric information; Pooling equilibria (search for similar items in EconPapers)
JEL-codes: C72 D82 L10 L12 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Entry with Two Correlated Signals (2014)
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