gameapproachillustratesageneralinsightthat rmsmaybeabletousenon-pricestrategiestosoftenpricecompetition.IntheKrepsandSheinkmanmodel,each rmrestrictsitscapacityasacommitmentnottochoosealowpricelater.An-othernon-pricestrategycanbeanychoiceofscalethatdeterminesthe rms’costfunctionswhichwouldinturndeterminetheconditionsofpricecompetitioninthesubsequentstage.Othernon-pricestrategiesusedtosoftenpricecompetitionmayincludeproductdi erentiation,most-favoredcustomerclauses,divestiturestrategies(TanandYuan,2003),frequent- yerprogramsinthecontextofairlines(BanerjeeandSummers,1987)andcustomerloyaltyprogramsinotherindustries.

Sometimes rmsmaymakeanearlycommitmentinordertostealcustomersfromtheircompetitorsorputtheircompetitorsinadisadvantageouspositionbyalteringtheircostfunctions.Therearestrategiesthat rmsoftenusetoraiserivals’costsorreducerivals’demands,someofwhichhavesigni cantcompetitionpolicyimplications.

Anotherimportantapplicationofsubgameperfectioninextensive-formgamesistocheckthecredibilityofentry-deterrencestrategies.ThisisnicelyillustratedinapaperbyJudd(1985).Theliteratureonentryhasarguedthatearlyinvestmentbyanincumbent rmtooccupymanyrelatedmarketsisane ectiveentry-deterrencestrategy.Judd(1985)providesaformalmodeltoarguethatastrategyconsistingincrowdingthemarketmaynotbecredibleandthereforenote ectiveinmanycontexts.Whenamulti-productincumbent rmcompeteswithanentrantinoneofitsmarkets,demandinmarketsforsubstitutegoodsfalls.If xedcostsarenotcompletelysunkandexitcostsarelow,theincumbentmaybebettero bywithdrawingitsproductandconcedingthemarkettotheentrant.Anticipatingthisoutcomeofproductmarketcompetition(backwardinduction),apotentialentrantwouldenter.Thus,thepotentialentrantisnotdeterredbytheincumbent rm’sinvestmentinamarket.

Inarelatedpaper,Hendricks,PiccioneandTan(1997)obtaintheoppositecon-clusionwhenproductsarecomplementsinsteadofsubstitutes.Theyshowthatamonopoly rmthatoperatesinseveralmarketswithcomplementarygoodshasstrongincentivestopricelowonthemarketwherethereisanentrantsinceother-wiseitspro tsintheothermarketswouldbereduced.Whenthecomplementaryrelationisstrongenoughorthenumberofcomplementaryproductslargeenough,theoptimalresponseofanincumbenttoentryisnottowithdrawitsproduct,evenifthenentrantstays.Thisanalysissuggeststhatcomplementaritiesamonggoodscanbeabarriertoentry.

Bothexamplesillustratethattheimportanceofbackwardinductioninanalyzingthecredibilityofbusinessstrategies.Anotherclassofgamesinextensive-formthathasmanyapplicationsinindustrialeconomicsisrepeatedgamesorsupergames.By