Strategic Sourcing and Entry Deterrence ∗

We show that incumbent firms can use sourcing strategy to make binding com-mitments and communicate them to potential entrants, therefore deter the entrants’ entry. By ordering key intermediate goods from an entrant, an incumbent is able to raise the entry barrier by convincing the entrant with an intense post-entry com-petition. At the same time, a joint surplus is generated and the entrant’s loss from staying out is compensated. Entry-deterring sourcing in general has ambiguous ef-fect on social welfare. However, there can be scenarios where it enhances not only social welfare, but also consumers ’ welfare