Entry under an information-gathering monopoly

The effects of information-gathering activities on a basic entry model with asymmetric information are analyzed. In the basic entry game, an incumbent monopoly faces potential entry by one firm without knowing with certainty whether this potential entrant is weak or strong. If the entrant decides to enter, the monopoly must compete with him and decide whether to accommodate or to fight. To include information-gathering activities, it is considered that the monopoly has access to an Intelligence System (IS) of a certain precision (exogenous and common knowledge) that generates a noisy signal about the entrant's type. When the monopoly believes that the entrant is weak, the probability of market entry increases only for the relatively inaccurate precision of the IS and decreases for relatively accurate precision. If the monopoly is not sure about the entrant’s level of strength or considers him to be strong, the information-gathering activities either have no effect on market entry or decrease the probability of entry. Not only do these results suggest that to inform the entrant credibly about information-gathering activities can be considered as a monopoly’s entry deterrence strategy, but they also provide give an idea about when to allow or not allow monopoly’s information-gathering activities.