Table of Contents
Economics Research International
Volume 2010 (2010), Article ID 105049, 10 pages
http://dx.doi.org/10.1155/2010/105049
Research Article

Entry Regulation under Asymmetric Information about Demand

Centre for Economics and Finance (CEF.UP), Faculty of Economics, University of Porto, 4200-464 Porto, Portugal

Received 10 April 2010; Revised 29 July 2010; Accepted 8 September 2010

Academic Editor: W. D Walls

Copyright © 2010 Paula Sarmento and António Brandão. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We investigate how an incumbent firm can use the regulatory policy about entry and the informational advantage to protect his market position. This question is studied through the construction of a signalling game where we assume that the regulator has less information about demand than the firms. We conclude that there is a pooling equilibrium and partially separating equilibria in which entry is deterred and, if demand is high, there will be insufficient entry. The final effect on welfare depends on the tradeoff between short-run benefits (lower price) and long-run losses (weaker competition).