Entry deterrence and signaling in a nonrenewable resource model

We analyze a nonrenewable resource model in which an incumbent firm faces p otential entry from a rival firm. The incumbent has private information abo ut its stock size but tile rival can observe extraction. With observable ex traction and unobservable stock, the rival can use extraction as a signal a bout stock, from which it can infer whether entry is likely to be profitabl e. We characterize the necessary conditions for pooling and separating perf ect Bayesian equilibria in a signaling game of resource extraction and prov ide examples of each. We show that the incumbent will often prefer pooling to separating even though welfare is higher in separating equilibrium. (C) 2001 Academic Press.