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Multidimensional Signalling and Diversification

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  • Yongmin Chen

Abstract

This article offers a new explanation of why firms diversify. I present a model in which a firm has private information about both its own cost and the demand function of the market on which it competes with another firm. I show that diversification can be used by the informed firm to signal private information in order to obtain competitive advantages. This provides an important motive for a firm to diversify. The signalling explanation of diversification is consistent with some empirical observations. A phenomenon called natural signalling is also studied in the model where both signals and private information are multidimensional.

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  • Yongmin Chen, 1997. "Multidimensional Signalling and Diversification," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 168-187, Spring.
    • Handle: RePEc:rje:randje:v:28:y:1997:i:spring:p:168-187
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    Cited by:

    1. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
    2. Kyle Bagwell, 2007. "Signalling and entry deterrence: a multidimensional analysis," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 670-697, September.
    3. Davide Vannoni, 2000. "The diversifield firm: non formal theories versus formal models," ECONOMIA E POLITICA INDUSTRIALE, FrancoAngeli Editore, vol. 2000(106).
    4. Wei Zhang, 2014. "Job Market Signalling With Two Dimensions Of Private Information," Bulletin of Economic Research, Wiley Blackwell, vol. 66(2), pages 113-132, April.
    5. Weinem, Michael & Heil, Oliver, 2010. "Pre-entry advertising, entry deterrence and multi-informational signaling," MPRA Paper 35001, University Library of Munich, Germany.

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