Signal Jamming and Limit Pricing: A Unified Approach

Eric Bennett Rasmusen, Kelley School of Business, Indiana University

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 (1982) 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.