MGT Notes

Reference: Strategic Management (5e) – Frank T. Rothaermel (Pg 87)

A Credible Threat of Retaliation is a reaction by incumbent firms to the entry of competitors in their market. Incumbents may retaliate for example by undertaking a price war which can cause industry profit potential to fall below the cost of capital. In this case, incumbents with sufficient resources will wait till the new entrants give up and exit, after which they can raise prices again.

Other forms of retaliation can be in the form of increased investments in innovation, advertising, sales promotions and litigation. This may happen especially if industry growth is slow, and incumbents want to protect their market share.

Thus, the Threat of Entry is high, when competitors know that incumbents cannot or will not retaliate in the above ways.