Entry Deterrence Through Insanity

Feigning insanity might deter rivals. Since sane businesspeople always try to maximize profit, threatening to maintain suicide prices isn’t usually credible because it’s not profit maximizing. If others perceive you as having objectives other then profit maximization, however, they might believe your threat to keep low prices. For example, imagine that others believed that you were irrationally committed to being king of your little hill, and that you would set whatever prices it took to be the dominant (and perhaps only) firm in your industry. Following through on such a strategy would obliterate your profits. Fortunately, if others believed that you would be silly enough to keep suicide prices, then they would never bother competing with you, so you would never actually have to kill your business with low prices.