Signaling Strategies in Competitive Interaction: Building Reputations and Hiding the Truth

The authors develop a conceptual framework of how managers interpret competitors' signals over time in various market contexts. From the framework, the authors generate hypotheses about the relative effectiveness of signaling strategies used by firms in different market contexts. The authors conducted two empirical studies involving a repeated entry-pricing game to test the hypotheses. The results of Study 1 show that the entrant's perceptions of the aggressiveness of the incumbent depend on the focus and strength of the incumbent's signals. The results of Study 2 show that the strength of the entrant's responses to the incumbent's signals depends on the incumbent's use of bluffs and the cost of information about the factors driving the incumbent's signals. The implications of these findings for how firms should signal to achieve such strategic objectives as revealing or concealing information, developing a desired reputation, and influencing competitors' responses over time are discussed. The authors conclude by discussing the limitations of the article and its implications for further research.