Entry, Stackelberg Equilibrium and Reasonable Conjectures*

This paper deals with the problem of entry deterrence in two different ways. First, we analyze conditions under which entry prevention is the best strategy for an incumbent firm, and second, we link entry prevention with another important field of industrial organization, the analysis of reasonable conjectures. That entry prevention may be of interest for incumbent firms has been studied by Osborne (1973), Spence (1977), Dixit (1979), Salop (1979), Milgrom and Roberts (1982) and Omori and Yarrow (1982). In aH these papers equilibrium concept is sorne kind of Stackelberg equilibrium in which potential entrants behave in Cournot fashion and the incumbent firm is a Stackelberg leader. We foHow this approach by widening the model to aHow more general conjectures for entrants. The theory of reasonable conjectures has been developed by Hahn (1978), in the framework of an exchange economy, and Hart (1982), in an oligopoly model with decreasing returns to scale. This theory attempts to endogenize conjectures assuming that firms choose those conjectures which maximize profits. 'BasicaHy the conjectures of firms are reasonable if, given the conjectures of aH other firms, no firm can increase its profit by departing from its own conjectures. That is, a resonable conjectural equilibrium is a Nash equilibrium where the strategies of firms are conjectures' [Hart (1982, p. 2)].