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

Signaling occurs when a firm attempts to indicate, truthfully or not, its intendedcourse of action. Competitors often use signaling in market entry situationsto coordinate actions, or possibly to deter entry by other firms. This paperexamines the value of cheap talk and costly signaling in a large group marketentry game. Eighty subjects, twenty in each of four groups, participated in acomputer-controlled decision making experiment. After learning the capacityof the market, subjects were given an opportunity to signal their intentions toenter or stay out. Following feedback of aggregate signals, subjects were askedto estimate the aggregate number of entry decisions they anticipated. Followingthe 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 wasimposed on signals (cheap talk), players significantly exaggerated their intentionsto enter the market. When signals were costly, signaling behavior wasmore consistent with subsequent entry decisions. Overall, however, neithercheap 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 andmanagement practitioners.