Entry Deterrence Through Strategic Trading
53 Pages Posted: 23 May 2023 Last revised: 14 Jan 2025
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: Suggested Citation