Rational Signals of Weakness in a Market Entry Game

It is well established that incumbent firms may try to deter market entry by pretending to be stronger than they really are. In this article, we show that in some cases an incumbent may prefer the opposite, namely to encourage entry by signaling weakness. If the incumbent cannot deter entry of a pot...

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Bibliographic Details
Published in:Journal of institutional and theoretical economics 2013-09, Vol.169 (3), p.519-530
Main Authors: Kamphorst, Jurjen J. A., Mendys-Kamphorst, Ewa, Westbrock, Bastian
Format: Article
Language:English
Subjects:
Competition
Competitive advantage
Economic potential
Enterprises
Game theory
Market entry
Rationality
Signalling
Studies
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Summary:It is well established that incumbent firms may try to deter market entry by pretending to be stronger than they really are. In this article, we show that in some cases an incumbent may prefer the opposite, namely to encourage entry by signaling weakness. If the incumbent cannot deter entry of a potential strong entrant by itself, it may elicit entry of a weaker firm that would not enter if it were informed about the incumbent's true strength. The presence of the additional firm can prevent further entry. Consequently, the incumbent faces a weaker competitor in the long run.
ISSN:0932-4569
1614-0559
DOI:10.1628/093245613X669439