Entry and espionage with noisy signals

Abstract

We analyze industrial espionage in the context of entry deterrence. We consider a monopoly incumbent, who may expand capacity to deter entry, and a potential entrant who owns an inaccurate Intelligence System. The Intelligence System generates a noisy signal on incumbent's actions and the potential entrant decides whether to enter based on this signal. If the precision of the Intelligence System is commonly known, the incumbent will signal-jam to manipulate the distribution of likely signals and hence the entrant's decisions. Therefore, the incumbent will benefit from his rival's espionage. In contrast, the spying firm (the entrant) will typically gain if the espionage accuracy is sufficiently high and privately known by her. In this setting, the market will be more competitive under espionage.

Entry under an Information‐Gathering Monopoly

“…That is, the signal sent by the IS is correct with probability (namely, and ). This IS is of exactly the same nature as that considered by Barrachina et al ( ) and the information devices in Solan and Yariv ().…”

“…As stated above, this paper is related to Barrachina et al ( ) and, consequently, to the references therein that theoretically analysed information‐gathering (or information‐sharing) activities in general and in an economic context. Moreover, this paper is related, on the one hand, to Begg and Imperato (), who analysed an information‐gathering monopoly (as in this paper) that in an attempt to learn more about uncertain market demand, and, on the other hand, to the principal‐agent literature where the agent can gather information before signing the contract.…”

“…Nevertheless, the theoretical analysis of the impact of information‐gathering activities on entry deterrence is more recent and it is illustrated by papers such as those by Barrachina et al ( ). The first of these two studies considered the stylized model of entry deterrence by capacity expansion and assumed that the entrant can obtain noisy information about the incumbent’s action.…”

“…According to them, a commonly known information‐gathering activity conducted by the entrant in a context of asymmetric information, as in the present paper, potentially increases competition. However, in a market entry setting with imperfect information, Barrachina et al () found that the entrant is more likely to enter the market only when the precision of the information‐gathering technology is his private knowledge.…”

Cross-Country Economic Espionage and Investment in Research and Development

“…Nevertheless, the over reward problem can be mitigated by hiring more spies to develop a competitive mechanism. Barrachina et al (2014) consider espionage and entry deterrence. They assume a potential entrant owns an Intelligence System to collect information regarding incumbent's action.…”