The effect of exit on entry deterrence strategies

Recent analyses of entry deterrence strategies have required an incumbent’s post-entry output or pricing strategy to be profit maximizing. However, most papers have continued to assume that either an incumbent can commit not to exit after entry or that exit is never optimal. When there are avoidable fixed costs of operating in any period, however, exit can be the optimal strategy. In this situation, entry deterrence strategies operate very differently than when exit is never optimal. In fact, the possibility of exit can make some, previously effective, strategies completely ineffective while improving the effectiveness of others. * I thank Jeremy Bulow, Ezra Friedman, Jae Nahm and seminar participants at the Federal Trade Commission and Georgetown University for helpful comments. The views expressed in this paper are those of the author and do not necessarily represent the views of the Federal Trade Commission or any individual commissioner. All errors are my own.