Entry with Two Correlated Signals

Review of Economic Design, 2010

This paper deals with the optimal regulation for cost-reducing R&D and pricing in natural monopoly that is privately informed on its efficiency. We extend the work of Cantner and Kuhn (Rev Econ Des 4:191-204, 1999) and then we are able to analyse the entire effects of the interplay between agent's efficiency and investment in R&D particularly considering the substitutability case.

2012

We consider an incumbent who operates in two independent markets and has private information about his production cost. In one of the markets, there is a potential entrant o¤ering a di¤erentiated product. The most reasonable perfect bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. The equilibrium may involve a downward distortion in both markets pre-entry prices. This distortion is increasing with the discount factor, the degree of product substitutability and the e¢ ciency of the entrant. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a su¢ cient condition for the existence of entry deterrence in the foreign market.

2009

Since seminal paper the existence of adverse selection due to asymmetric information about quality is well-understood. Given the negative implications for trading and welfare, the question arises of how such markets come into existence. We consider a market in which firms make observable investment/entry decisions that generate products of a quality that becomes known only to the firm. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are supported in the market equilibrium, which results in above normal profits.

International Journal of Game Theory, 2021

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SSRN Electronic Journal, 2020

We investigate the impact of vertical price restraints on the free-entry equilibrium and its welfare properties in a vertically related market where manufacturer-retailer hierarchies compete under asymmetric information. We compare the legal regimes of laissez-faire and ban on resale price maintenance (RPM) under different entry decision modes. When the entry decision is taken upstream, laissez-faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the spread of demand uncertainty. Conversely, when the entry decision is taken downstream, a ban on RPM stimulates entry and consumer surplus, but laissez-faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.

Review of Economic Dynamics, 2003

This paper studies competitive equilibria in economies characterized by the presence of asymmetric information, where non-exclusive contracts are traded on competitive markets and agents may be privately informed over their payoff. For such economies competitive equilibria may not exist when contracts trade at linear prices. We show that (non-trivial) competitive equilibria exist, under general conditions, with a minimal requirement on the observability of agents' trades: two-part tariffs suffice, where the cost of trading each contract consists of an entry fee and a linear component in the quantity traded. The entry fee is determined at equilibrium and represents a measure of adverse selection in the economy.

Review of Economic Studies, 2004

We consider an infinitely-repeated Bertrand game, in which prices are perfectly observed and each firm receives a privately-observed, i.i.d. cost shock in each pciiod. We focus on symmetric perfect public equilibria (SPPE), v^'herein any "punishments" are borne equally by all firms. We identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each firm is strictly increasing in its cost level: such "fully-sorting" schemes offer efficiency benefits, as they ensure that the lowest-cost firm makes the current sale, but they also imply an informational cost (distorted pricing and/or equilibrium-path price wars), since a higher-cost firm must be deterred from mimicking a lower-cost firm by charging a lower price. A rigid-pricing scheme, where a fum's collusive price is independent of its current cost position, sacrifices efficiency benefits but also diminishes the informational cost. For a wide range of settings, the optimal symmetric collusive scheme requires (i). the absence of equiUbrium-path price wars, and (ii). a rigid price. If firms are sufficiently impatient, however, the rigid-pricing scheme cannot be enforced, and the collusive price of lower-cost firms may be distorted downward, in order to diminish the incentive to cheat.

SSRN Electronic Journal

We study firms' incentives to acquire private information in a setting where subsequent competition leads to firms' later signaling their private information to rivals. Due to signaling, equilibrium prices are distorted, and so while firms benefit from obtaining more precise private information, the value of information is reduced by the price distortion. Thus, compared with firms that do not attempt to manipulate rivals' beliefs, signaling firms acquire less precise information. An industry-wide trade-association acquiring information increases firm profit and may also increase consumer surplus, so allowing such collective action may be in the interest of regulatory authorities.

2007

We consider a two-period framework where a multimarket incumbent …rm faces, in one of the markets, a single potential entrant o¤ering a di¤erentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We …nd multiple pure strategy perfect bayesian equilibria. Using equilibrium re…nements, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the e¢ ciency of the entrant.

Journal of Economic Dynamics and Control, 2016

This article studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies. We show that due to hidden competition the follower is more eager to invest. As a result the entry deterrence strategy of the leader becomes more costly and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.