Deterrence: Definition, Example and Related Terms
What is a Deterrence ?
Deterrence, in a commercial context, is a strategy employed by companies to discourage or prevent undesirable actions or decisions by other business entities. The objective of deterrence is not to punish but to discourage actions or decisions that could have negative impacts on the company's operations, reputation, or financial standing. For instance, a company may include clauses in its contracts that impose penalties for breaches of the contract. The penalty serves as a deterrent, discouraging the other party from violating the contract terms.
Scenario Description A software development company is entering into a contract with a client. The client wants the exclusive rights to the software. The company could include a deterrence clause in the contract stating that if the client breaches the contract by sharing the software with unauthorized third parties, the client would have to pay a hefty penalty. This penalty acts as a deterrent, discouraging the client from sharing the software illegally. A manufacturing company is entering a new market where there are already several established competitors. The company might set its prices lower than its competitors as a way of deterring them from lowering their prices. This pricing strategy acts as a deterrent, discouraging the competitors from engaging in a price war.