We consider a vertically integrated incumbent and an entrant who is privately informed
of his production cost and is going to enter the downstream industry. We introduce the
concept of the entry invoking behavior of a potential entrant. By “entry invoking behavior,”
we mean the entrant’s offer of a higher input price than his first best price under full
information to convey the information that his entry benefits the incumbent as well. A high
price signals a low cost of the entrant and accordingly a high profit of the integrated firm in
a separating equilibrium. In a separating equilibrium, only the efficient (low-type) entrant
enters the market, although some efficiency loss in signaling may be incurred. This signaling
consideration casts a doubt on the efficiency of the retail-minus access price regulation. We
also discuss the possibility of inefficient entry in a pooling equilibrium.