Signaling the Strength of a Market Entrant

摘要

This article belongs to the game theoretic and information economicsliterature dealing with the problem of signaling in the context of gametheoretical models of entry into the industry. As opposed to the majority of literaturewe consider the situation of asymmetric information where the privateinformation belongs to the entrant. We model the capacity decision of the entrantas a signal of his strength. We show that in the Stackelberg model of marketentry for some values of underlying parameters the entrant fully utilizes his capacitywhile for other parameter values he builds excess capacity. The modelmay be empirically relevant for industrial organization analysis of the entry of anew supplier to the existing supply chain.