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When should a firm expand its business?

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  • Espínola-Arredondo, Ana
  • Gal-Or, Esther
  • Muñoz-García, Félix

Abstract

We 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 informativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant.

Suggested Citation

  • Espínola-Arredondo, Ana & Gal-Or, Esther & Muñoz-García, Félix, 2011. "When should a firm expand its business?," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 729-745.
  • Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:729-745 DOI: 10.1016/j.ijindorg.2011.04.001
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    References listed on IDEAS

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    Cited by:

    1. Felix Munoz-Garcia & Gulnara Zaynutdinova, 2013. "Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 563-597, December.

    More about this item

    Keywords

    Business expansion; Signaling; Entry deterrence; Failure rates;

    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

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