Entry and espionage with noisy signals |
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Institution: | 1. CER-ETH Center of Economic Research at ETH Zurich and CEPR Zürichbergstrasse 18 8092 Zurich, Switzerland;1. Simon Fraser University, Department of Economics, 8888 University Drive, Burnaby, BC V5A 1S6, Canada;2. University of Oregon, 1285 University of Oregon, Eugene, OR, USA;3. University of St. Andrews, Scotland, United Kingdom;4. Bank of Canada, 234 Wellington Street Ottawa, ON K1A 0G9, Canada |
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Abstract: | We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbent?s actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrant?s decisions. If the precision of the IS is commonly known, the incumbent benefits from his rival?s espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive. |
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Keywords: | Espionage Entry Asymmetric information Signal-jamming |
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