Incumbent firms' response to entry: Price, advertising, and new product introduction

Abstract

Theoretical research shows that one of the more important determinants of entry is the anticipated response of incumbent firms. Incumbents can use price, advertising, or new products to limit or deter entry. Most empirical research however finds little support for these models. Using data from the ready-to-eat cereal industry I find that incumbents accommodate other incumbents on price and new products but use advertising to limit the scale of entry. Entrants are more likely to be met with an aggressive price response. I also find that incumbents are more likely to respond when the scale of entry is greater.