“Strategic Effects of Investment and Private Information: The Incumbent's Curse”, DEMB Working Paper Series N. 121, (with L. Brighi)

We study a two-period entry model where the incumbent, privately informed about his cost of production, makes a long run investment choice along with a pricing decision. Investment is costreducing and its eects are assumed to dier across incumbent's types, as a result investment plays a double role as a commitment variable and, along with price, as a signal. We ask whether and how investment decisions allow the incumbent to limit entry into the market. We nd that the incumbent will never undertake strategic investment to deter protable entry, because when incumbent's costs are private information the signaling role of investment cancels out its value of commitment.