Abstract
This paper is based on a two‐stage model of an incumbent firm and a potential entrant, and studies both quantity‐setting competition and price‐setting competition. We consider a lifetime‐employment‐contract policy as a strategic commitment that generates kinks in the reaction curve. Furthermore, demand functions are classified into two cases in terms of the strategic relevance between both firms. Therefore, we examine the following four cases: ‘quantity‐setting competition with strategic substitutes’, ‘quantity‐setting competition with strategic complements’, ‘price‐setting competition with strategic substitutes’ and ‘price‐setting competition with strategic complements’. The purpose of this paper is to analyse entry deterrence in the four cases and to show the effectiveness of the lifetime‐employment‐contract policy as a result of its analyses.
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