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Strategic Effects of Investment and Private Information: The Incumbent’s Curse

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  • Luigi Brighi
  • Marcello D'Amato

Abstract

We study a two-period entry model where the incumbent, privately informed about his cost of production, makes a long run investment choice along with a pricing decision. Investment is costreducing and its effects are assumed to differ across incumbent’s types, as a result investment plays a double role as a commitment variable and, along with price, as a signal. We ask whether and how investment decisions allow the incumbent to limit entry into the market. We find that the incumbent will never undertake strategic investment to deter profitable entry, because when incumbent’s costs are private information the signaling role of investment cancels out its value of commitment.

Suggested Citation

  • Luigi Brighi & Marcello D'Amato, 2017. "Strategic Effects of Investment and Private Information: The Incumbent’s Curse," Center for Economic Research (RECent) 134, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    • Handle: RePEc:mod:recent:134
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    References listed on IDEAS

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    More about this item

    Keywords

    Entry deterrence; commitment; limit pricing; multiple signaling;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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