Entry deterrence and signaling in markets for search goods
This paper studies entry in markets for search goods. Signaling through prices is studied when an entrant s quality is (i) private information; and (ii) common information of entrant and incumbent. When consumers visit a store, they observe quality and can switch before purchasing. When switching costs are low, an entrant can signal high quality by setting a sufficiently high price; consumers who find out that quality is low switch to the incumbent. Entry may be facilitated when switching costs are sufficiently low, or when the incumbent knows the entrant s type.
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