Entry Deterrence Through Strategic Trading

53 Pages Posted: 23 May 2023 Last revised: 14 Jan 2025

See all articles by Chong Huang

Chong Huang

University of California, Irvine - Paul Merage School of Business

Xiaoqi Xu

Institute of Financial Studies, Southwestern University of Finance and Economics

Date Written: January 14, 2024

Abstract

This paper studies interactions between product market and secondary financial market. An entrant learns about product demand from the incumbent’s stock market, where a strategic investor internalizes his trading impact on potential entry. Without an initial stake, the investor fully harvests arbitrage opportunities based on his private information. Conversely, with an initial stake, the investor sells in low-demand scenarios but may refrain from buying in high-demand situations to dissuade the entrant, with buying probability varying with entry cost non-monotonically. The initial stake increases (decreases) entry probability at relatively small (large) entry costs. Modest stock trading costs foster product market competition.

Keywords: Informed trading, industrial organization, informational feedback, belief manipulation, real effect

JEL Classification: D21, D42, D43, D82, D84, G14

Suggested Citation

Huang, Chong and Xu, Xiaoqi, Entry Deterrence Through Strategic Trading (January 14, 2024). Available at SSRN: https://ssrn.com/abstract=4451871 or http://dx.doi.org/10.2139/ssrn.4451871

Chong Huang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Xiaoqi Xu

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

Office 201, Institute of Financial Studies
Southwestern University of Finance and Economics
Chengdu, Sichuan 610074
China

HOME PAGE: http://xiaoqx1.wixsite.com/catherinexu

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