Entry Regulation under Asymmetric Information about Demand: A Signalling Model Approach
This paper presents a game where the incumbent firm uses the price as a signal about demand size. Without observing the demand, the regulator has to decide if the entry of new firms will be allowed. The game has a pooling Perfect Bayesian Equilibrium in which the incumbent firm chooses the optimal price corresponding to low demand. With this strategy entry is deterred. With linear demand the pooling equilibrium is more likely to occur if the regulator expects a weaker form of competition. Besides, if there are two incumbent firms they have incentive to tacitly cooperate in order to deter entry.
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