Duopoly signal jamming

1993

This paper examines a repeated duopoly market with heterogeneous outputs. Firms have (common) prior beliefs over the values of an unknown parameter of each firm's demand curve. Firms cannot observe rivals' quantities, but can observe market prices, which are subject to random disturbances and hence provide noisy information that firms use to update their beliefs concerning the unknown parameters' values. Each firm can potentially signal jam, or strategically vary its output level in order to manipulate the distribution of likely market prices and hence the likely inferences drawn by the opponent. We find that the opportunity to signal-jam introduces two conflicting effects, arising out of t…