Rational Signals of Weakness in a Market Entry Game

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