ABSTRACT
When you are finished with this chapter you should understand:
That when firms can enter or exit a market in the longer run, an incumbent firm can strategically choose its scale of production or capacity to affect the behavior of potential entrants into its market
That an incumbent firm can adopt a strategy to accommodate entry or to deter entry by a potential competitor
Why an incumbent may decide to overinvest in capacity to deter entry, and the role played by fixed costs in determining the incumbent’s optimal investment strategy
How the concept of a limit price can be used to describe conditions under which it would be more profitable to deter entry or accommodate entry of a new firm
How the effect of an investment in capacity by an incumbent can be broken down into a direct effect and a strategic effect, and how the strategic effect will depend upon whether the incumbent wants to deter or accommodate entry, and whether firms compete in prices or quantities
