credibility

credibility

1. 1the extent to which individuals and firms believe that the government will carry out the macro-economic policies that it promises to pursue. Credibility is important in influencing the EXPECTATIONS that individuals and firms have about future economic policies, and these expectations in turn affect their current behaviour.
2. the extent to which potential market entrants believe that incumbent firms will react to their entry, for example, by cutting their prices. The credibility of such threats by incumbent firms will determine whether potential entrants decide to enter a market.

See BARRIERS TO ENTRY, LIMIT PRICING, POTENTIAL ENTRANT.