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Entry Regulation under Asymmetric Information about Demand: A Signalling Model Approach

Author

Listed:
  • Paula Sarmento

    (CETE, Faculdade de Economia, Universidade do Porto)

Abstract

This paper presents a game where the incumbent firm uses the price as a signal about demand size. Without observing the demand, the regulator has to decide if the entry of new firms will be allowed. The game has a pooling Perfect Bayesian Equilibrium in which the incumbent firm chooses the optimal price corresponding to low demand. With this strategy entry is deterred. With linear demand the pooling equilibrium is more likely to occur if the regulator expects a weaker form of competition. Besides, if there are two incumbent firms they have incentive to tacitly cooperate in order to deter entry.

Suggested Citation

  • Paula Sarmento, 2003. "Entry Regulation under Asymmetric Information about Demand: A Signalling Model Approach," CEF.UP Working Papers 0304, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:cetedp:0304
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    File URL: http://www.fep.up.pt/investigacao/cete/papers/dp0304.pdf
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    Citations

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    Cited by:

    1. João Vareda, 2007. "Access Regulation under Asymmetric Information about Demand," Working Papers 30, Portuguese Competition Authority.
    2. Jeong-Yoo Kim & Sawoong Kang, 2014. "Entry Invoking," Korean Economic Review, Korean Economic Association, vol. 30, pages 247-271.
    3. Paula Sarmento & António Brandão, 2008. "Regulatory design under asymmetric information about demand," CEF.UP Working Papers 0802, Universidade do Porto, Faculdade de Economia do Porto.
    4. Vareda, João, 2010. "Access regulation under asymmetric information about the entrant's efficiency," Information Economics and Policy, Elsevier, vol. 22(2), pages 192-199, May.

    More about this item

    Keywords

    asymmetric information; entry regulation; signalling;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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