IDEAS home Printed from https://ideas.repec.org/p/mtl/montde/8754.html
   My bibliography  Save this paper

Financial Signalling and the "Deep Pocket" Argument

Author

Listed:
  • Poitevin, M.

Abstract

This Paper Provides a Formal Representation of Telser (1966)'S Deep Pocket Argument. According to Telser, Predation May Take Place Because Typical Entrants Are More Vulnerable Financially Than Are Typical Incubents. We Propose That Entrants' Financial Vulnerability May Be Explained by Informational Problems in Financial Markets. We Model a Situation in Which Financiers Are Uncertain of the True Value of an Entrant. At the Same Time, Financiers Know the Incubent's True Value. Both Types of Firm Have to Finance a Fixed Expenditure Before Starting Production. in Equilibrium, the Incubent Finances with Equity, While the High Value Entrant Must Issue Debt to Signal Its Quality to Investors. It Enters the Market Heavily Leveraged Compare to the Incubent. This Provides Incentives for the Incubent to Engage in a Price War to Financially Exhaust the Entrant and Cause Its Bankruptcy. the Price War May Be Intepreted As the Incubent's Predatory Response to the Entrant's Leveraged Entry. a Diversified Pool of Undistinguishable Entrants Is Sufficient to Justify the Deep Pocket Argument Put Forward by Telse (1966). We Base Ou Explanation on the Presence of Asymmetric Information in Financial and Output Markets.

Suggested Citation

  • Poitevin, M., 1987. "Financial Signalling and the "Deep Pocket" Argument," Cahiers de recherche 8754, Universite de Montreal, Departement de sciences economiques.
  • Handle: RePEc:mtl:montde:8754
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    More about this item

    Keywords

    Asymmetry ; Information;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mtl:montde:8754. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharon BREWER). General contact details of provider: http://edirc.repec.org/data/demtlca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.