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Multidimensional Signalling and Diversification

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  • Yongmin Chen

Abstract

This article offers a new explanation of why firms diversify. I present a model in which a firm has private information about both its own cost and the demand function of the market on which it competes with another firm. I show that diversification can be used by the informed firm to signal private information in order to obtain competitive advantages. This provides an important motive for a firm to diversify. The signalling explanation of diversification is consistent with some empirical observations. A phenomenon called natural signalling is also studied in the model where both signals and private information are multidimensional.

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  • Yongmin Chen, 1997. "Multidimensional Signalling and Diversification," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 168-187, Spring.
    • Handle: RePEc:rje:randje:v:28:y:1997:i:spring:p:168-187
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    Cited by:

    1. Kyle Bagwell, 2007. "Signalling and entry deterrence: a multidimensional analysis," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 670-697, September.
    2. Davide Vannoni, 2000. "The diversifield firm: non formal theories versus formal models," ECONOMIA E POLITICA INDUSTRIALE, FrancoAngeli Editore, vol. 2000(106).
    3. Anton Miglo, 2008. "Project financing versus corporate financing under asymmetric information," Working Papers 0812, University of Guelph, Department of Economics and Finance.
    4. Wei Zhang, 2014. "Job Market Signalling With Two Dimensions Of Private Information," Bulletin of Economic Research, Wiley Blackwell, vol. 66(2), pages 113-132, April.
    5. Weinem, Michael & Heil, Oliver, 2010. "Pre-entry advertising, entry deterrence and multi-informational signaling," MPRA Paper 35001, University Library of Munich, Germany.

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