Pre-entry advertising, entry deterrence and multi-informational signaling
Advertising is commonly regarded as a strategic tool to increase demand and steal business from competitors. The present work studies the competitive effects of advertising in a two-period game with incomplete information about the opponent's cost structure. Bagwell and Ramey (1988) showed that deterring entry is possible by signaling lower costs even if the post-entry game is independent of the pre-entry advertising decision. Assuming that pre-entry advertising by an entrant affects the post-entry game, then the incumbent is forced to do more than in the Bagwell/Ramey case to deter entry; he needs to distort costs downwards more extensively. On the other hand, introductory advertising does not facilitate entry if the entrant learns from the signal that competition with the incumbent is unprofitable. In this case, the entrant abstains from entry after performing introductory advertisng. Furthermore, if the incumbent has private information on cost and advertising effectiveness, then he can deter entry by acting as if he had lower production costs and a better advertising effectiveness. In this scenario, entry deterrence is associated with overinvestment in advertising but not with limit pricing, which is a new prediction. The use of multi-informational signals, i.e. pooled information on more than one type of private information transferred by one signal, is methodologically a new development of the classical signaling game.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Thomas, Louis A., 1999. "Incumbent firms' response to entry: Price, advertising, and new product introduction," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 527-555, May.
- Alemson, M A, 1970. "Advertising and the Nature of Competition in Oligopoly Over Time: A Case Study," Economic Journal, Royal Economic Society, vol. 80(318), pages 282-306, June.
- In-Koo Cho & David M. Kreps, 1997.
"Signaling Games and Stable Equilibria,"
Levine's Working Paper Archive
896, David K. Levine.
- Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August.
- Cubbin, John S & Domberger, Simon, 1988. "Advertising and Post-entry Oligopoly Behaviour," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 123-40, December.
- James M. Ferguson, 1967. "Advertising and Liquor," The Journal of Business, University of Chicago Press, vol. 40, pages 414.
- Brown, Randall S, 1978. "Estimating Advantages to Large-Scale Advertising," The Review of Economics and Statistics, MIT Press, vol. 60(3), pages 428-37, August.
- Wilson, Robert, 1985. "Multi-dimensional signalling," Economics Letters, Elsevier, vol. 19(1), pages 17-21.
- William J. McNally, 1999. "Multi-dimensional signaling with fixed-price repurchase offers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(3), pages 131-150.
- Lester G. Telser, 1962. "Advertising and Cigarettes," Journal of Political Economy, University of Chicago Press, vol. 70, pages 471.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:35001. 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: (Joachim Winter)
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.