Reputatie

In game theory,'reputation to deter entry' explores how firms discourage competitors by building a reputation for aggressive responses.

Consider Walmart facing entry from a local grocery chain and potentially other future competitors.

If Walmart chooses not to contest the local entry, it appears less aggressive, which could attract more competitors.

To maintain a reputation as a fierce competitor, Walmart might accept short-term costs to deter future threats.

If the local grocery chain does not enter, the game ends. It earns zero profit, and Walmart enjoys a high profit of 8 million dollars by keeping the market to itself.

If the local grocery chain decides to enter, Walmart can respond aggressively or accommodate the new competitor.

If Walmart chooses to be aggressive, a price war will occur, resulting in low profits — negative 2 million dollars for the local grocery chain and 2 million dollars for Walmart.

Alternatively, if Walmart chooses to accommodate and the local grocery chain enters, both firms can share the market, earning moderate profits. The local grocery chain will earn 2 million dollars, and Walmart will earn 5 million dollars.

Therefore, Walmart will opt to be aggressive, and its reputation as an aggressive player alone could deter entry.