Price-Setting Games and Entry Deterrence

Abstract

This chapter considers a two-stage price-setting model of an established firm and a potential entrant and investigates whether the use of strategic commitments by the established firm is effective to deter entry. Most studies on entry deterrence examine the situation of strategic complements where goods are substitutes in Bertrand competition. Therefore, the chapter divides demand functions into four cases, and correlates each case with either of two opposite strategic commitments. This chapter examines the entry-deterring equilibrium outcomes resulting from the strategic commitments of the established firm in all four cases and shows that strategic commitments can be used as an effective tool for entry deterrence in Bertrand competition.

Keywords: Complementary goods, donation, entry deterrence, entry-deterring equilibrium, established firm, lifetime employment, potential entrant, price-setting model, strategic complements, strategic substitutes, substitute goods, two-stage game.