Financial Signalling and the "Deep-Pocket" Argument
AbstractThis 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.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 20 (1989)
Issue (Month): 1 (Spring)
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Other versions of this item:
- Poitevin, M., 1987. "Financial Signalling and the "Deep Pocket" Argument," Cahiers de recherche 8754, Universite de Montreal, Departement de sciences economiques.
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