Abstract
We consider the advertising and pricing strategies of an incumbent firm who is concerned with deterring or accommodating entry and privately informed as to the level of market demand. Our fundamental result is that a demand-exaggerating distortion occurs: if the incumbent seeks to signal a low (high) demand, then he behaves as if there were complete information but demand were lower (higher) than it is. Pre-entry pricing and demand-enhancing advertising are therefore distorted downward (upward), as a consequence of signaling. Purely dissipative advertising is thus not employed as a signal. Refinements of sequential equilibrium are featured.
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