9781118041581

entry. This possibility is depicted in Figure 10.2b’s game tree. Be sure to note

the reversal in the order of the moves.

Maintaining a lower-than-monopoly price to forestall entry is called limit

pricing. Cutting price before entry is intended as a signal of the incumbent’s

price intentions after entry. But is it a credible signal? Again, the real issue is

420 Chapter 10 Game Theory and Competitive Strategy

0, 12

(a)

(b)

Enter

Do not enter

Maintain price

Cut price

4, 6

–4, 4

E

I

Maintain price

Cut price

Enter

Do not enter

4, 6

0, 12

Enter

Do not enter

–4, 4

0, 9

E

E

I

FIGURE 10.2

Deterring Entry

In part (a), E is not

deterred by I’s empty

threat to cut price. In

part (b), I deters entry

by committing to a

limit price before entry

occurs.

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