This chapter considers a two-stage price-setting model of an
established firm and a potential entrant and investigates whether the use of
strategic commitments by the established firm is effective to deter entry. Most
studies on entry deterrence examine the situation of strategic complements
where goods are substitutes in Bertrand competition. Therefore, the chapter
divides demand functions into four cases, and correlates each case with either
of two opposite strategic commitments. This chapter examines the
entry-deterring equilibrium outcomes resulting from the strategic
commitments of the established firm in all four cases and shows that strategic
commitments can be used as an effective tool for entry deterrence in Bertrand
competition.
Keywords: Complementary goods, donation, entry deterrence,
entry-deterring equilibrium, established firm, lifetime employment,
potential entrant, price-setting model, strategic complements, strategic
substitutes, substitute goods, two-stage game.
