Signal Jamming

Signal Jamming^[6]

Sometimes you want to prevent your competitor from acquiring useful information. Imagine that a potential business rival test-markets his product in a few stores in your area. The results of these tests will provide your rival with a signal as to whether he should enter your market. When should you interfere with these tests? If you could secretly interfere, then you could always forestall competition by surreptitiously causing your rival’s test marketing to fail. But what if you couldn’t interfere without your rival finding out?

Say the only way that you could mess with his test marketing would be to drastically alter your prices in the stores in which he was selling his products. By randomly varying your prices, you prevent your rival from getting any useful information from his test marketing. Before engaging in visible signal jamming, however, you need to determine what your rival will do in the absence of any new information. Perhaps he is 90 percent sure he should enter. He is just test marketing to guarantee that he is not making a mistake. In this case, visible signal jamming would just ensure that he would enter. What if your rival is almost certain that he should not enter, but is test marketing to see if you are weaker than he previously thought? If he was almost certain that he shouldn’t compete, and you prevent him from acquiring any new information, will he now stay out of your market? Unfortunately, if you visibly interfere with his test marketing, your rival would necessarily gain valuable information. He would learn that you are scared enough of him to go to the trouble to mess with his signal. Your rival might interpret your signal jamming as a sign that you are weak, and he should enter.

Signal jamming is most effective when your rival hopes to receive a multidimensional signal. Let’s assume that there are many different types of products your rival could sell, but he’s not sure which to offer in your market. At a significant expense, he manufactures multiple prototypes and sells each type in a separate store. If you now were to signal-jam by, say, radically lowering prices in some stores and raising them in others, you would make it very difficult for your rival to formulate an entrance strategy. He wouldn’t know which prototype would sell best in your area. When your rival’s decision is binary, enter or not, it’s difficult to visibly signal-jam, for such jamming tells him that he should enter. If your rival’s decision is multifaceted, then signal jamming can be very effective because while it does show your fear, it also prevents your rival from determining how to best compete against you.

^[6]See Dixit and Skeath (1999), 404.