Pricing and entry strategies for competitive firms with optimistic entrant

Abstract

AbstractEntrepreneurs are usually optimistic when entering an existing market. We introduce the entrant's optimism into the game models of entry deterrence to study the entry strategy of the potential entrant and the pricing (deterrence) strategy of the incumbent. Further, we examine the impacts of the entrant's optimism on the optimal decisions for both firms in the post‐entry game (Stackelberg price competition). In the price ex‐post setting, our analysis shows that in the post‐entry game, the entrant's optimism increases both firms’ prices and could benefit both firms. For the entry strategy, the high optimism of the entrant induces an incorrect entry decision; and our results reveal that the low optimism of the entrant benefits her entry. As for the pricing strategy, the incumbent will blockade the low optimistic entrant by keeping the normal price, impede the moderately optimistic entrant by lowering price, or accommodate the high optimistic entrant by setting the post‐entry price. Additionally, we consider the asymmetric information (about the entrant's type) setting, the price ex‐ante setting, and two optimistic firms setting. We find that the asymmetric information could not make the entrant benefit from her optimism, which is inconsistent with the symmetric information case; the entrant may miss the opportunity to enter the market in the price ex‐ante setting; and the incumbent's optimism makes him worse off.