Advertising can be very informative for consumers. But by raising the
costs of new entrants, advertising can also act as a powerful entry barrier.
Patrick Batchelder/Alamy Stock Photo
- Predatory Pricing as an Entry Barrier
A firm will not enter a market if it expects continued losses after entry. An
existing firm can create such an expectation by cutting prices below costs
whenever entry occurs and keeping them there until the entrant goes
bankrupt. The existing firm sacrifices profits while doing this, but it sends
a discouraging message to potential future rivals, as well as to present
ones. Even if this strategy is costly in terms of lost profits in the short run,
it may pay for itself in the long run by creating reputation effects that deter
the entry of new firms at other times or in other markets that the firm
controls. Predatory pricing is illegal in Canada, and a number of firms
have been convicted of using it as a method of restricting entry.