The use of entry deterrence strategies by market incumbents has long been a topic of interest in industrial organization. Many models in this setting emphasize the use of specific ways as the established firm’s strategic tool for deterring entry.

This paper studies the constrained firm’s ability to deter entry into its market. We consider a scenario where a firm is self has the capability to pursue successfully strategies that will prevent the entry of new firms into its market. This means that we will not examine the regulations which government legislate to make entry more difficulty or even impossible, albeit a government may make competition illegal and a statutory monopoly be established.

There are a lot of different ways how an incumbent firm reacts when facing the threat of entry. Actually, incumbents pursue so many different strategies to seemingly the same problem, namely threat of entry. In order to enter in the market entrant has to deal with some kind of hurdles-difficulties; Barriers to entry are those factors that allow incumbents to earn positive economic profits, while making it unprofitable for newcomers to enter the industry. Barriers to entry may be structural or strategic. Structural entry barriers result when the incumbent has natural cost or marketing advantages (as advertising, research and development, distributor and supplier arguments and so on) or benefits from favourable regulations (such as government regulations). Strategic entry barriers result when the incumbent aggressively deters entry. Assuming that the incumbent monopolist’s market is not perfectly contestable, it may expect to reap additional profits if it can keep out entrants. We discuss three ways in which it might do so: Entry-deterring strategies may include limit pricing, predatory pricing, and capacity expansion.

The first form of strategy that a firm can expand to successfully defer the entrance of a new firm in the market is the limit pricing, which may be expressed by two types: the contestable limit pricing and the strategic limit pricing. By the time the incumbent prices lower than the entrant’s marginal cost and also that present price is in accordance with the market demand then contestable limit pricing is expanded, whereas the incumbent has excess capacity and a marginal cost advantage over entrants. While strategic limit pricing occurs when contestable limit pricing is insufficient. In that way the incumbent sets such a lower price as it may be unable to meet market demand and if this may not be enough to keep the entrant out of the market, the incumbent will have to sacrifice profits in order to assure entrant’s exclusion. The limit pricing will be clearer as an entry-deterring strategy factor by stating the rule of switching costs first and then examining entrant’s reactions in each incumbent’s movements to try to bar any new firm’s existence from the market.

In a low growth market, switching costs deter entry as the incumbent has the majority of the market covered and its profit margin equals the switching cost. Firms will have to run a loss to enter the market and it can be assumed that the incumbent will react aggressively to the new entrants. In a market with above average growth middle range switching costs are the most conducive to entry. Low switching costs deter entry, as firms will have to run a loss in the initial entry period. Profits are lower as there is more less scope to exploit locked in consumers. Incumbents are therefore more likely to invest in order to attract new customers that are reacting aggressively to entrants. With high switching costs, firms earn good profit margins and may be willing to forego these temporarily in order to preserve their monopoly and so are hostile to entrants.