When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion

Ana Espinola-Arredondo, Esther Gal-Or () and Felix Munoz-Garcia

No 2008-16, Working Papers from School of Economic Sciences, Washington State University

Abstract: We examine an incumbent's trade-off between the improved efficiency that business expansion facilitates and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. We demonstrate that both separating and pooling equilibria survive the Intuitive Criterion. Essentially, in contrast to models with asymmetric information about unit cost, incumbents' benefits from investing in a signal are not necessarily monotonic in the state of demand. We investigate how the extent of in formativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant. Revised November 2009.

Keywords: Business expansion; Signaling; Entry deterrence. Failure rates (search for similar items in EconPapers)
JEL-codes: D82 L12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2009-02
New Economics Papers: this item is included in nep-bec, nep-com and nep-cta
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