Noncooperative Behavior by a Cartel as an Entry-Deterring Signal

Recent work has investigated the effect of a potential entrant's uncertainty about postentry profits on the likelihood of his entering the market. It has always been assumed that the potential entrant knows the type of postentry solution, but lacks information on cost or as to whether the postentry solution will be cooperative or noncooperative. We find that entry is more likely, the greater is the preentry profit rate. In equilibrium, the threat of entry then forces the incumbent firms to act more competitively to deter entry.