Strategic Effects of Investment andPrivate Information: The Incumbent's Curse

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 effects are assumed to differ 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 find that the incumbent
will never undertake strategic investment to deter profitable entry, because when incumbent’s costs are
private information the signaling role of investment cancels out its value of commitment