Entry and espionage with noisy signals

- The paper analyzes industrial espionage in the context of entry deterrence.
- A monopoly incumbent may expand its capacity to deter entry and a potential entrant owns an inaccurate Intelligence System.
- The Intelligence System generates a noisy signal and the potential entrant decides whether to enter based on this signal.
- When the precision of the Intelligence System is commonly known, the incumbent benefits from his rivalʼs espionage.
- The entrant gains when the espionage accuracy is sufficiently high and privately known by her.

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.