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The Informative Role of Subsidies

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  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    ()
    (School of Economic Sciences, Washington State University)

Abstract

This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only an informative equilibrium can be supported, where information about the incumbent's costs is conveyed to the entrant, but also an uninformative equilibrium, where the actions of regulator and incumbent conceal the monopolist's type, thus deterring entry. While the regulator?s role can support entry-deterrence practices, we demonstrate that his presence is nonetheless welfare improving. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete information environments, and standard entry-deterrence games where the regulator is absent.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2011-10.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2011-10.

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Length: 32 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:wsu:wpaper:espinola-10

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Related research

Keywords: Entry deterrence; Signaling; Monopoly subsidies;

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  1. Albaek, Svend & Overgaard, Per Baltzer, 1994. "Advertising and pricing to deter or accommodate entry when demand is unknown: Comment," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 83-87, March.
  2. David B. Ridley, 2008. "Herding versus Hotelling: Market Entry with Costly Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 607-631, 09.
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