Private Information and the Commitment Value of Unobservable Investment

Luigi Brighi () and Marcello D'Amato

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

Abstract: The commitment value of unobservable investment with cost-reducing effects is examined in an entry model where the incumbent is privately informed about his costs of production. We show that when the price signals incumbent’s costs, unobservable investment can not have any commitment value and the limit price does not limit entry. By contrast, if the price does not reveal costs, which is the more likely outcome, unobservable investment has a magnified value of commitment and a less aggressive limit price deters profitable entry.

Keywords: Commitment; entry deterrence; limit pricing; signaling (search for similar items in EconPapers)
JEL-codes: D24 D82 L12 L41 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:mod:recent:135

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