Strategic entry deterrence.
Entrant
Incumbent
Stay out
Enter
Fight
Share
(
π
M
-C,
0
)
(
π
W
,
π
W
)
(
π
S
-C,
π
S
)
w
Incumbent invests C (a sunk cost) in (for example) excess
production capacity useful only in the event of a price war.
w
The threat is now credible if
π
W
> π
S
-C.
w
The threat is worth making if
π
M
-C
> π
S
.
w
So choose C so that
π
M
-
π
S
> C > π
S
-
π
W
.
