Doomsday Device
The threat to fight any potential entrant is credible if its reputation is built up, or it can set up conditions that make it optimal to fight if a rival enters.
If there are relatively low barriers to exit within a market, an incumbent faced with competing against a more efficient rival may find it optimal to exit the market rather than fight. Hence, one way to make a fighting threat credible is for the incumbent to artificially raise the cost of exit, for example by having high sunk costs.
Examples of this are railroad companies. The high sunk cost of laying a network of railway lines makes it likely that a rail operator will be willing to fight a more costly price war than a rival with lower sunk costs, for example an airline that can switch its aircraft to another route relatively easily. At the extreme, if the incumbents sunk costs are very high, any entry by a rival will end in a mutually destructive outcome.
Read more about this topic: Strategic Entry Deterrence
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