Managerial Economics and Strategy, 2/e

13.3 Deterring Entry

The Stackelberg game demonstrates that the leader firm can benefit from moving before the follower firm. In some markets, by moving first, a manager can act strategically to prevent potential rivals from entering the market. How can an incumbent, monopoly firm deter a (potential) rival from entering that market? Does it pay for the incumbent to take the actions that will deter entry?

The incumbent may prevent entry if it can make a credible threat. However, a manager cannot deter entry merely by telling a potential rival, “Don’t enter! This market ain’t big enough for the two of us.” The potential rival would merely laugh and suggest that the manager’s firm exit if it doesn’t want to share the market. The following examples ...