Okayama Economic Review
Published by the Economic Association of Okayama University


Ohnishi, Kazuhiro
The limit pricing model by Bain, Sylos−Labini and Modigliani is a famous theory on entry deterrence. A single incumbent firm or a coordinated cartel competes against a single potential entrant. The limit pricing model assumes that the incumbent firm can continue to produce at its pre−entry output level regardless of the potential entrant’s actions. However, it has been pointed out that the limit pricing model is unrealistic and only an empty threat. That is, it is possible to judge the success of the incumbent firm’s strategic behavior only if the decisions that the incumbent firm made prior to entry cause changes in the post−entry competing environment. Irreversible behavior, such as the installation of machinery and equipment, can be said to be the essence of competition among firms. The possibility of firms using excess capacity to deter entry has been studied by many economists. This paper surveys theories of entry deterrence.