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When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion

Author

Listed:
  • Ana Espinola-Arredondo
  • Esther Gal-Or
  • Felix Munoz-Garcia

    (School of Economic Sciences, Washington State University)

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 in formativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant. Revised November 2009.

Suggested Citation

  • Ana Espinola-Arredondo & Esther Gal-Or & Felix Munoz-Garcia, 2009. "When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion," Working Papers 2008-16, School of Economic Sciences, Washington State University.
  • Handle: RePEc:wsu:wpaper:espinola-4
    as

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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2008-16.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Business expansion; Signaling; Entry deterrence. Failure rates;
    All these keywords.

    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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