Entry deterrence strategies for an incumbent supply chain in the presence of inertial consumer and optimistic entrant

Abstract

AbstractWhen entering a new market, entrepreneurs generally hold an optimistic belief about the inertia of consumers (i.e., consumer's tendency to repurchase the incumbent product), leading to a high rate of failure. This paper constructs a supply chain with one manufacturer, one retailer, and one potential optimistic entrant who attempts to enter the wholesaling market. We characterize how the behaviors of the entrant's optimism and consumer's inertia jointly affect the pricing (deterrence) strategy of the incumbent manufacturer, entry strategy of the entrant, and equilibrium decisions in the post‐entry game. Interestingly, our results show that: (i) in the post‐entry game, both behaviors could benefit the two manufacturers but are detrimental to the retailer; (ii) in the entry strategy, when consumers are moderately inertial or the entrant is highly optimistic, the entrant will suffer from an incorrect entry decision and then has an unprofitable entry; (iii) in the pricing strategy, the incumbent manufacturer will set the normal wholesale price to blockade the entry if consumers have high inertia or the entrant has a low optimism; otherwise, he will set a new price to accommodate the entry. Furthermore, we discuss two different cases, finding that (iv) the existence of the retailer weakens the deterrent power of the incumbent manufacturer; and (v) the retailer will induce the manufacturer to accommodate the entry when the entrant is moderately optimistic.