The Value of Cheap-Talk and Costly Signals In Coordinating Market Entry Decisions


Market Entry

How to Cite

The Value of Cheap-Talk and Costly Signals In Coordinating Market Entry Decisions. (2004). Journal of Business Strategies, 21(1), 69-94.


Signaling occurs when a firm attempts to indicate, truthfully or not, its intended
course of action. Competitors often use signaling in market entry situations
to coordinate actions, or possibly to deter entry by other firms. This paper
examines the value of cheap talk and costly signaling in a large group market
entry game. Eighty subjects, twenty in each of four groups, participated in a
computer-controlled decision making experiment. After learning the capacity
of the market, subjects were given an opportunity to signal their intentions to
enter or stay out. Following feedback of aggregate signals, subjects were asked
to estimate the aggregate number of entry decisions they anticipated. Following
the estimation task, subjects had to decide whether or not to enter the market,
which varied in size from trial to trial. Results suggest that when no cost was
imposed on signals (cheap talk), players significantly exaggerated their intentions
to enter the market. When signals were costly, signaling behavior was
more consistent with subsequent entry decisions. Overall, however, neither
cheap talk nor costly signaling had much effect on actual market coordination,
and aggregate results generally are consistent with Nash equilibrium predictions.
The study concludes with a discussion of insights for researchers and
management practitioners.


This article is distributed using a Creative Commons Attribution-NonCommercial 4.0 license. Copyright remains with the author(s).