INFORMATION ASYMMETRY AND SIGNALING BEHAVIOR IN MARKET ENTRY GAMES: LABORATORY AND FIELD EXPERIMENTAL EVIDENCE

Abstract

Information asymmetry profoundly shapes strategic interaction in market entry games, where incumbents possess private knowledge about costs, demand, or type those potential entrants lack, creating incentives for costly signaling to deter entry, coordinate outcomes, or reveal quality. This review synthesizes theoretical models and experimental evidence from laboratory and field settings on signaling mechanisms limit pricing, excess capacity, advertising, reputation building, and predatory pricing under incomplete information. Core frameworks include Spence-style signaling, Milgrom-Robert’s limit pricing, and Bagwell-Ramey models of dissipative advertising, with equilibrium outcomes depending on signal costliness, credibility, and separating versus pooling dynamics. Laboratory experiments consistently show that incumbents over-invest in deterrence signals when entry threats are salient, while entrants exhibit cautious behavior and excess entry occurs less frequently than predicted by symmetric-information models. Field evidence from industries such as pharmaceuticals, e-commerce, and retail reveals mixed deterrence success, with reputation and repeated interaction often proving more effective than one-shot costly signals. The analysis highlights behavioral deviations overconfidence, loss aversion, and bounded rationality that drive deviations from equilibrium predictions, as well as welfare implications: while signaling can reduce inefficient entry, excessive deterrence may harm consumer surplus and innovation. The review concludes that effective policy design must account for both rational strategic incentives and empirical behavioral regularities to balance entry barriers and market efficiency.