Entry under an Information‐Gathering Monopoly

Abstract

The effects of information‐gathering activities on an entry model with asymmetric information are analysed. The baseline game is a classical entry game where an incumbent monopoly faces potential entry by a firm without knowing for certain whether this potential entrant is weak or strong. If the entrant decides to enter, the incumbent must compete with him and decide whether to accommodate or to fight. The paper extends this entry game and considers that the monopoly credibly informs the entrant that she is able to gather information about his type if he finally enters the market, thereby helping her to better decide whether to accommodate or fight. Since knowing this might reduce the entrant’s willingness to compete with her, we focus the analysis on the effectiveness of this monopoly’s communicative action as an entry deterrence strategy. The results suggest that such an action is effective regardless of the precision of the Intelligence System (IS) only for a relatively low payoff gained by the entrant from competing with the incumbent. For higher payoffs for the entrant, the effectiveness of this action requires a considerably accurate IS.