Can low-price guarantees deter entry?

This paper examines the strategic use of low-price guarantees (LPGs) as an entry deterrent. The entire space of contemporaneous LPG messages is partit ioned according to their ability to deter entry and/or increase the incumbe nt's profits. While most price-matching and price-beating guarantees cannot deter entry into a perfectly contestable market, there do exist special cl asses of price-beating guarantees that enable the incumbent to prevent entr y. Interestingly, both price-matching and price-beating can be a part of th e incumbent's strategy in subgame perfect equilibria of the game where the firms choose LPGs from 14 classes defined in the paper. (C) 2001 Elsevier S cience B.V. All rights reserved.