Signalling and entry deterrence: a multidimensional analysis

I consider whether a privately informed incumbent can use limit pricing and upward distortions in advertising to deter profitable entry. Profitable entry is not deterred when the incumbent is privately informed only about its cost type. Profitable entry may be deterred, however, if the incumbent is privately informed about its cost type and its patience level. An equilibrium foundation is thus provided for the traditional hypothesis that limit pricing and aggressive advertising by an incumbent may deter profitable entry. At a methodological level, the article contributes by characterizing the refined equilibria of a signalling model with multiple dimensions of private information and multiple signals.

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