The Korean Economic Review
Entry Invoking
Jeong-Yoo Kim (Kyung Hee University) and Sawoong Kang (Handong Global University)Year 2014Vol. 30No. 2
We consider a vertically integrated incumbent and an entrant who is privately informedof his production cost and is going to enter the downstream industry. We introduce theconcept of the entry invoking behavior of a potential entrant. By “entry invoking behavior,”we mean the entrant’s offer of a higher input price than his first best price under fullinformation to convey the information that his entry benefits the incumbent as well. A highprice signals a low cost of the entrant and accordingly a high profit of the integrated firm ina separating equilibrium. In a separating equilibrium, only the efficient (low-type) entrantenters the market, although some efficiency loss in signaling may be incurred. This signalingconsideration casts a doubt on the efficiency of the retail-minus access price regulation. Wealso discuss the possibility of inefficient entry in a pooling equilibrium.