When is entry deterrence the wiser strategy for a firm?

Abstract

This paper examines the idea that if an incumbent firm deviates from short-term profit maximization behavior and deters the entry of a potential entrant at the expense of higher profit, then its own mid-/long-term profit maximization is achieved. The paper confirms the importance of the entry-deterrence behavior of the incumbent firm by using numerical examples of learning by doing.

JEL classification: C72, D21, L20