I consider a two period model with an incumbent firm and a potential entrant each of whom produces a homogeneous good. There is a demand uncertainty and the information regarding the demand is asymmetric: the incumbent possesses private information concerning the state of demand while the entrant only knows the probability distribution. I show that under certain cost structure of the incumbent (which is common knowledge), using capaciy as a signalling device, the incumbent can reliably convey the information to the potential entrant regarding the state of demand; while in some other cost environment such a signalling has no effect. Outcomes are more desirable where signalling truly reveals and more importantly convince the entrant about the true state of demand compared to those where signalling does not reveal.
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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number
1997-12.
Find related papers by JEL classification: D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information