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Strategic Entry Deterrence: Game Theory Analysis of Incumbent and Entrant Dynamics

This chapter explores strategic entry deterrence models using game theory, detailing scenarios where incumbents decide whether to prevent market entry. It discusses simultaneous entry games, Cournot and Stackelberg equilibria, and the implications of investment decisions on market entry. Key figures illustrate best-response curves and the profitability of different strategies, while tables summarize entrant responses and advertising games. This analysis provides insights into how incumbents can strategically manage competition to safeguard market positions.

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Strategic Entry Deterrence: Game Theory Analysis of Incumbent and Entrant Dynamics

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  1. Chapter 14 Strategy

  2. Table 14.01 Simultaneous Entry Game

  3. Figure 14.01 Whether an Incumbent Pays to Prevent Entry First stage Second stage p , p ) ( i e Do not enter ( p , $0) m Do not pay Entrant Enter ( p , p = R – F ) d d Incumbent Pay for exclusive rights (entry is impossible) ( – b , $0) p m

  4. Figure 14.02 Noncredible Threat ( p , p ) i e Cournot output ($300, $300) Incumbent Large output ( – $100, – $100)

  5. Figure 14.03 Game Trees for the Deterred Entry and Stackelberg Equilibria (a) Entrant s Fixed Cost Is $100. ’ ( p , p ) i e Do not enter ($900, $0) q = 30) Accommodate ( i Entrant Enter ($450, $125) Incumbent Do not enter ($800, $0) q Deter ( = 40) i Entrant Enter ($400, $0) (b) Entrant ’ s Fixed Cost Is $16. Do not enter ($900, $0) Accommodate ( q = 30) i Entrant Enter ($450, $209) Incumbent Do not enter ($416, $0) Deter ( q = 52) i Entrant Enter ($208, $0)

  6. Table 14.02 Entrant’s Best Response and Profit

  7. Figure 14.04 Cournot and Stackelberg Equilibria (a) Best-Response Curves q , Units e per period 60 Incumbent ’ s best-response curve 30 e c 20 e s 15 Entrant ’ s best-response curve 0 20 30 60 q , Units per period i (b) Incumbent ’ s Profit p , $ per period i 450 400 p i 0 20 30 60 q , Units per period i

  8. Figure 14.05 Incumbent Commits to a Large Quantity to Deter Entry (a) Entrant ’ s Best-Response Curve q , Units per period e 30 Entrant ’ s best-response curve e s 15 e d 10 0 30 40 60 q , Units per period (b) Incumbent s Profit ’ , Incumbent π ’ s i Profit per period, $ 900 800 p m p i 450 p s 0 30 40 60 q , Units per period

  9. Figure 14.06 Incumbent Loss If It Deters Entry (a) Entrant ’ s Best-Response Curve q , Units per period e 30 Entrant ’ s best-response curve e s 15 0 30 52 60 q , Units per period i (b) Incumbent ’ s Profit p , $ per period i 900 p m 450 416 p i p s 0 30 52 60 q , Units per period i

  10. Figure 14.07 Investment Game Tree ( p , p ) i e Do not enter ($900, $0) Do not invest Entrant Enter ($400, $300) Incumbent Do not enter ($500, $0) Invest Entrant Enter – ($132, $36)

  11. Figure 14.08 Raising-Costs Game Tree ( p , p ) i e Do not enter ($10, $0) Do not raise costs Entrant Enter ($3, $3) Incumbent Do not enter ($6, $0) Raise costs $4 Entrant Enter ( $1, – $1) –

  12. Application Evidence on Strategic Entry Deterrence

  13. Figure 14.09 Advertising Price of Coke, p , $ per unit c 19 17 e 2 p = 12 B 2 p = 11 e 1 1 p 1 MC = AC 5 2 1 D D 2 1 MR MR 0 Q = 24 Q = 28 68 76 1 2 Q , Units of Coke per year c

  14. Figure 14.10 Shifts in the Marginal Benefit of Advertising Marginal benefit, marginal cost, $ per unit 2 1 MB MB MC A A 2 1 Minutes of advertising time purchased per day

  15. Table 14.03 Advertising Game

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