... level, a strategy known as limit pricing. Not only will this reduce the profits being made, making it less attractive for entrants, but it will also mean that the incumbent is meeting more of the market demand, leaving any potential entrant with a much smaller space in the market. Limit pricing will only be an optimal strategy if the smaller profits made by the firm are still greater than those risked if a rival entered the market. It also requires commitment, for example the building of a larger factory to produce the extra capacity, for it to be a credible deterrent. Signalling The incumbent firm has the advantage of being the "first mover" - it can therefore act in a way that it knows will influence the entrant's decision in the second period. If we assume imperfect knowledge (i.e. the incumbent firm's costs are only known privately) the entrant can only make ...

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