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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Book Chapters

Signal Jamming and Limit Pricing: A Unified Approach

1997,

Eric Bennett Rasmusen

Abstract

In signal jamming, an rival uses observed profits to predict profitability, but those profits can be manipulated by a rival firm. In the present model, the size of the market is known to the incumbent, who is one of two firms that might occupy it. The potential rival observes profits, which can be manipulated by the incumbent. Depending on the monopoly premium and the prior probability that the market is large, the equilibrium may be pooling in pure or mixed strategies,
or separating, which are similar to the signal-jamming and signalling equilibria of Fudenberg & Tirole (1986) and Milgrom & Roberts (1982a) respectively. In contrast to the common result that strategic behavior encourages innovation even though it introduces current distortions, in this model the possibility of strategic behavior can either encourage or discourage entry into markets as yet unserved by any firm.

Citation

Rasmusen, Eric Bennett (1997), "Signal Jamming and Limit Pricing: A Unified Approach," Moriki Hosoe and Eric Rasmusen (eds.), Public Policy and Economic Analysis, Fukuoka, Japan: Kyushu University Press.