Chapter Summary

This chapter is new to the 4^th edition. It contains an assortment of topics that can be used as a stand alone chapter or to supplement coverage in other chapters.

The first part of the chapter begins with limit pricing. It is stressed that this strategy is not a panacea because some form of asymmetry (such as commitment mechanisms, learning curve effects, incomplete information, or reputation effects) must be present. Furthermore, dynamic considerations must be evaluated. Predatory pricing is identified as a potential tool for reducing the number of existing competitors. However, predatory pricing is typically more costly for the predator than the prey, and that the predator must have "deeper pockets" or some other advantage in order for this strategy to work. Competition can also be lessened through strategies that raise rivals' fixed or marginal costs. Unfortunately, all of these strategies involve economic tradeoffs. Before implementing them, a manager must determine whether the potential benefits of the strategies exceed the associated costs.

The second part of this chapter focuses on first- and second-mover advantages, and explains when it is profitable to change the business environment by altering the timing or sequence of decisions. We conclude by pointing out that first-mover advantages are typically strong in network industries (such as telecommunications, airlines, and the Internet). Penetration pricing is a strategy entrants can use to potentially overcome these obstacles.