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Entry with Two Correlated Signals

Author

Listed:
  • Alex Barrachina

    () (Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Yair Tauman

    () (IDC Herzliya, Israel and Department of Economics, Stony Brook University, NY, USA)

  • Amparo Urbano

    () (Department of Economic Analysis, University of Valencia,Spain)

Abstract

We analyze the effect of industrial espionage on limit-pricing models. We consider an incumbent monopolist engaged in R&D trying to reduce his cost of production and deter a potential entrant from entering the market. The R&D project may be successful or not and its outcome is a private information of the incumbent. The entrant has an access to an Intelligence System (IS hereafter) of a certain precision that generates a noisy signal on the outcome of the R&D project, and she decides whether to enter the market based on two signals: the price charged by the incumbent and the signal sent by the IS. It is assumed that the precision of the IS is exogenous and common knowledge. Our fundamental result is that for intermediate values of the IS precision, the set of pooling equilibria is non-empty even with profitable entry and the entrant enters if the IS tells her the R&D project was not successful. Since in the classical limit- pricing models the entrant never enters in a pooling equilibrium, the use of the IS by the entrant increases competition in pooling equilibrium with high probability. Moreover, the incumbent can deter profitable entry with positive probability.

Suggested Citation

  • Alex Barrachina & Yair Tauman & Amparo Urbano, 2015. "Entry with Two Correlated Signals," Working Papers 2015/14, Economics Department, Universitat Jaume I, Castellón (Spain).
  • Handle: RePEc:jau:wpaper:2015/14
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Alex Barrachina, 2016. "Entry under an information-gathering monopoly," Working Papers 2016/09, Economics Department, Universitat Jaume I, Castellón (Spain).

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    More about this item

    Keywords

    Espionage; Entry deterrence; Asymmetric information; Pooling equilibria;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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