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Signaling and entry deterrence: A multi-dimensional analysis

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Kyle Bagwell () (Department of Economics, Columbia University)

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Abstract

This paper considers a long-standing question in the field of Industrial Organization: Can an incumbent firm price and advertise so as to deter entry that otherwise would be profitable? For the most part, the first economists to consider this question give affirmative answers. Braithwaite (1928) and Robinson (1933) offer early informal remarks in support of the view that advertising has an entry-deterrence effect. Bain (1949) provides an early argument that an incumbent may deter entry by limit pricing (i.e., by pricing below the monopoly price), and Williamson (1963) later develops an analogous argument that an incumbent can deter entry by committing to a low price and a high advertising level. Important early empirical contributions by Bain (1956) and Comanor and Wilson (1967, 1974) offer inter-industry evidence that is broadly consistent with the hypothesis that advertising by established firms generates an entry barrier.

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File URL: http://www.econ.columbia.edu/RePEc/pdf/DP0506-16.pdf
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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0506-16.

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Length: 51 pages
Date of creation: 2006
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Handle: RePEc:clu:wpaper:0506-16

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  1. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
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  2. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January. [Downloadable!] (restricted)
  3. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113. [Downloadable!] (restricted)
  4. Armstrong, Mark, 1999. "Price Discrimination by a Many-Product Firm," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 151-68, January. [Downloadable!] (restricted)
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  5. Shleifer, Andrei & Vishny, Robert W, 1990. "Equilibrium Short Horizons of Investors and Firms," American Economic Review, American Economic Association, vol. 80(2), pages 148-53, May. [Downloadable!] (restricted)
  6. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
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  7. Ishigaki, Hiroaki, 2000. "Informative advertising and entry deterrence: a Bertrand model," Economics Letters, Elsevier, vol. 67(3), pages 337-343, June. [Downloadable!] (restricted)
  8. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  9. Stein, Jeremy C, 1988. "Takeover Threats and Managerial Myopia," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 61-80, February. [Downloadable!] (restricted)
  10. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March. [Downloadable!] (restricted)
  11. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  12. Narayanan, M P, 1985. " Managerial Incentives for Short-term Results," Journal of Finance, American Finance Association, vol. 40(5), pages 1469-84, December. [Downloadable!] (restricted)
  13. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring. [Downloadable!] (restricted)
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  14. Laurent Linnemer, 1998. "Entry Deterrence, Product Quality: Price and Advertising as Signals," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(4), pages 615-645, December. [Downloadable!] (restricted)
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  15. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November. [Downloadable!] (restricted)
  16. Kyle Bagwell & Garey Ramey, 1991. "Oligopoly Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 155-172, Summer. [Downloadable!] (restricted)
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  17. Bagwell, Kyle, 1992. "Pricing to Signal Product Line Quality," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(1), pages 151-74, Spring.
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  18. Albaek, Svend & Overgaard, Per Baltzer, 1992. "Upstream Pricing and Advertising Signal Downstream Demand," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 677-98, Winter.
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  19. Yongmin Chen, 1997. "Multidimensional Signalling and Diversification," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 168-187, Spring. [Downloadable!] (restricted)
  20. Needham, Douglas, 1976. "Entry Barriers and Non-Price Aspects of Firms' Behavior," Journal of Industrial Economics, Blackwell Publishing, vol. 25(1), pages 29-43, September. [Downloadable!] (restricted)
  21. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  22. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August. [Downloadable!] (restricted)
  23. Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer. [Downloadable!] (restricted)
  24. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
  25. Bagwell, Kyle, 1992. "A Model of Competitive Limit Pricing," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(4), pages 585-606, Winter.
  26. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August. [Downloadable!] (restricted)
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