When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion
AbstractWe examine an incumbent's trade-off between the improved efficiency that business expansion facilitates and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. We demonstrate that both separating and pooling equilibria survive the Intuitive Criterion. Essentially, in contrast to models with asymmetric information about unit cost, incumbents' benefits from investing in a signal are not necessarily monotonic in the state of demand. We investigate how the extent of in formativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant. Revised November 2009.
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Bibliographic InfoPaper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2008-16.
Length: 36 pages
Date of creation: Feb 2009
Date of revision:
Business expansion; Signaling; Entry deterrence. Failure rates;
Find related papers by JEL classification:
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-03 (All new papers)
- NEP-BEC-2009-01-03 (Business Economics)
- NEP-COM-2009-01-03 (Industrial Competition)
- NEP-CTA-2009-01-03 (Contract Theory & Applications)
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