Chapter 6 Flashcards
What is entry
Entry is the beginning of production and sales by a new firm in a market
How do entrants threathen incumbents
- they take market share away from incumbents
- entry often intensifies competition, leading to lower prices
Remember: more firms imply lower prices
What is exit
Exit occurs when a firm ceases to produce in a market
What is the distinction between new and diversifying firms with regards to entry
A new firm is one that did not exist before it entered a market
A diversified firm is one that is active in a product or geographic market but has chosen to diversify into others
Why is the distinction between new and diversifying firms important
It may affect the costs of entry and appropriate strategic response
What are the most common entry and exit patterns
1.Entry and exit will be pervasive
2.Entrants and exiters tend to be smaller than established firms
3. Most entrants do not survive 10 years, but those that do grow precipitously
4.Entry and exit rate vary by industry
What are three important implications for strategy regarding entry and exit
- when planning for the future, the manager must account for entry
- managers should expect most new ventures to fail quickly
- managers should know the entry and exit conditions of their industry
What are postentry profits
Postentry profits are the excess of revenues over ongoing operating expenses
What are sunk entry costs
Give an example
These are for example the costs of specialized capital equipment to government licences
What is postentry competition
Postentry competition represents the conduct and performance of firms in the market after entry has occurred
What determines whether there are barriers to entry
The sum total of the analysis of the sunk costs and post entry competition
What does barriers to entry allow incumbents to do
Barriers to entry allow incumbent firms to earn positive economic profits while making it unprofitable for newcomers to enter the industry
What are structural barriers to entry
Structural entry barriers exist when the incumbent has natural costs or marketing advantages, or when the incumbent benefits from favorable regulations
What are strategic entry barriers to entry
what is the result of strategic entry barriers
Strategic entry barriers result when the incumbent takes aggressive actions to deter entry
What are bain’s typology of entry conditions
1.Blockaded entry
2.Accommodated entry
3.Deterred entry
Define Blockaded entry
Entry is blockaded if structural barriers are so high that the incumbent do nothing to deter entry. For example high sunk entry costs, or low postentry profitability
Define Accommodated entry
Entry is accommodated if structural entry barriers are low, and either (a) entry-deterring strategies will be ineffective or (b) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out.
Define Deterred entry
Entry is deterred (a) if the incumbent can keep the entrant out by employing an entry-deterring strategy and (b) if employing the entry-deterring strategy boosts the incumbents profits
What are predatory acts
In the scenario of deterred entry; entry-deterred strategies are called predatory acts; this is because the may either raise entry costs or reduce prostentry profits
What is the strategic distinction between entrants and incumbents
- Incumbents and entrants will naturally differ in financial resources and productive capabilities, but the incumbent does not neccessarily have the advantage.
- Incumbent usually have incurred sunk entry costs while entrants have not.
- Asymmetries also arise from relationships with customers and suppliers that can take years to build
What are the three main types of structural entry barriers
1.Control of essential resources
2.Economies of scale and scope
3.Marketing advantages of incumbency
Explain control of essential resources as a structural entry barrier
An incumbent is protected from entry if it controls a resource or channel in the vertical chain and can use that resource more effectively than newcomers
Explain economies of scale and scope as a structural entry barrier
When economies of scale are significant, established firms operating at or beyond the minimum efficient scale (MES) will have substantial cost advantage over smaller entrants
Explaing Marketing advantages of incumbency as a structural entry barrier
An incumbent can exploit the umbrella effect to offset uncertainty about the quality of a new product that it is introducing, which an entrant can not.
What are exit barriers
Exit barriers often stem from sunk costs, such as when firms have obligations that they must meet whether or not the cease operations
When are entry deterring strategies worth it
- The incumbent earns higher profits as a monopolist than it does as duopolist
- The strategy changes entrants’ expections about the nature of postentry competition
What are the three entry deterring strategies
1.Limit pricing
2.Predatory pricing
3.Strategic bundling
Explain entry deterring strategy: Limit pricing
Limit pricing refers to the practice whereby and incumbent firm charges a low price to discourage new firms from entering
Is the Strategic Limit pricing rational?
Not really, depending cost and demand, the incumbent might be better off as a cournot duopolist that as a perpetual monopoly limit-pricer (this is when the entran hangs around indefinitly)
Explain entry deterring strategy: predatory pricing
Predatory pricing occurs when a large incumbent sets a low price to drive smaller rivals from the market and to warn potential entrants.
What is the chain-store paradox
The paradox is that many firms appear to engage in predatory pricing , despite the theoretical conclusion that the strategy is irrational
What is an war of attrition
In a war of attrition, two or more parties expend resources battling with each other. eventually the survivor claims its rewards
When will predatory pricing not deter entry
when it lacks the capacity to meet the demand of increase in customer demand
Explain entry deterring strategy: Strategic bundling
Bundling occurs when a combination of goods or services is sold a price that is less than what it would cost to buy the same items separately. Example: happy meal
What are judo economics
When smaller firms and potential entrants can use the incumbent’s size to their own advantage. For example slashing prices and imposing revenue destruction effect
What is the entry deterrence checklist
Sunk costs
Production barriers
Reputation
Switching costs
Tie up access
Limit pricing
Predatory pricing
Holding excess capacity