Chapter 12 - Market Foreclosure Flashcards
entry accommodation
if entry costs are low, then no matter what the incumbent does, the entrant is better off by entering, since its gross profits are always greater than the entry costs
entry deterrence/blockaded entry
if entry costs are higher than the gross profits, no matter what capacity the entrant chooses, its gross profit is always lower than its entry costs. So the entrant is better off not entering.
The Stackelberg Model
characterises an incumbent’s optimal strategy if entry is given. It corresponds to the strategy of entry accommodation
The Stackelberg Model
characterises an incumbent’s optimal strategy if entry is given. It corresponds to the strategy of entry accommodation
an incumbent’s optimal capacity choice depends on the level of entry costs. If entry costs are very high, then the incumbent should set (1) and ignore the threat of entry
- monopoly capacity
if entry costs are very low, then the incumbent should choose (1) to induce the entrant not to enter
- capacity large enough
there is a fundamental discontinuity in the entrant’s strategy
as the incumbent increases its capacity, the entrant gradually decreases its capacity
beyond a certain level the entrant’s optimal capacity altogether drops to zero
irreversibility of choices
if players’ choices are easily reversible, then the entire premise of sequentiality of moves with one move per player falls apart
capacity preemptions
setting capacity below demand to get higher profits
is a credible strategy only if capacity costs are high and sunk
product proliferation
strategy whereby a firm extends its product offer in a market or submarket so as to saturate the product space and minimize unmet demand
entrants can’t find any “market hole”, incumbents may deter entry even when profit margins are high
naked exclusion
The ability of an incumbent firm to deter entry by writing exclusionary contracts with customers
divide and conquer
a fraction (1-a) of buyers are offered a contract with a price a little lower than the monopoly price in return for agreeing to exclusivity (not buying from the entrant
bundling (market power)
by bundling or tying sales of two products, a dominant firm may leverage its power in one market to increase dominance in the other market
raising rivals’ costs
contract exclusivity, selective discounts, and most-favored-nation clauses may be a way of rising rivals’ costs and, as such, foreclosing competition
predatory pricing
act of setting prices low to attempt to eliminate the competition
