Rational Signals of Weakness in a Market Entry Game

It is well-established that incumbent firms may try to deter new market entry by pretending to be stronger than they really are (e.g. by imitating the high output level of a low cost monopolist). In this article, we show that in some cases an incumbent may prefer the opposite, namely to encourage entry by signalling weakness. If the incumbent cannot deter entry of a potential strong entrant by itself, it may elicit entry of a weaker rm that would not enter if it were informed about the incumbent's true strength. The presence of the additional rm can prevent further entry. Consequently, the incumbent faces a weaker competitor in the long run