Question

Can the threat of a price war deter entry by potential competitors?What actions might a firm take to make threat credible?

Answer 1

There are several steps taken by the firm for making credible threat. Most of them are;
Increasing the cost will reduce the entrants of new firms and also increase the credibility.
The public visibility will make difficult to negotiate from a threat.
The visibility of the public incurred sunk cost. Finding someone else to take care the place of a firm. This need careful calculation. If there is no loss, this sunk cost will not affect the production process.
Creating a reputation for making credible threats.
This leverage creation will make a shadow in the future.