Chapter 6 - entry and exit Flashcards
dynamics of competition
how business decisions evolve over time
contestable market
a market where the mere threat of entry can limit the incumbent’s ability to raise prices
entry as an investment
entrant hopes that post-entry profits > sunk entry costs
post-entry costs
the excess of revenues over ongoing operating expenses
post-entry competition
conduct and performance of firms in the market after entry
barriers to entry
allow incumbents to earn positive economic profits while making it unprofitable for newcomers to enter the industry
two forms of entry barriers
- structural
- strategic
structural barriers
incumbent has natural cost or marketing advantages or favorable regulations
strategic barriers
incumbent takes aggressive actions to deter entry
Bain’s typology of entry conditions
- blockaded entry
- accommodated entry
- deterred entry
blockaded entry
if structural barriers are so high that the incumbent need do nothing to deter entry
accommodated entry
if structural barriers are low, either
- entry deterring strategies will be ineffective or
- the cost to the incumbent of trying to deter entry exceeds the benefits
deterred entry
- if the incumbent can keep the entrant out by employing an entry-deterring strategy
- if employing the entry-deterring strategy boosts the incumbent’s profit
predatory acts
entry-deterring strategies that increase entry costs or reduce post-entry profits
three main types of structural barriers
- control of essential resources
- economies of scale and scope
- marketing advantages of incumbency
exit barriers
when the firm chooses to remain in the market, but given the opportunity to revisit its entry decision, would not have entered in the first place
entry price
the price at which the firm is indifferent between entering the industry and staying out
entry deterring strategies
- limit pricing
- predatory pricing
limit pricing
the practice whereby an incumbent charges a low price to discourage new firms from entering
predatory pricing
when a large incumbent sets a low price to drive smaller rivals from the market
chain-store paradox
many firms appear to engage in predatory pricing, despite the theoretical conclusions that the strategy is irrational –> importance of asymmetry in knowledge
wars of attrition
two or more parties expend resources battling with each other
strategic bundling
a combination of goods/services is sold at a price that is less than what it would cost to buy the same items separately
judo economics
an incumbent firm can use its size and reputation to put smaller rivals at a disadvantage. sometimes, smaller firms and potential entrants can use the incumbent’s size to their own advantage
–> revenue destruction effect: when an incumbent slashes prices to drive an entrant from the market, it stands to lose more revenue than its smaller rivals
theory of contestable markets
the mere threat of entry can force the incumbent to lower prices.
–> key requirement: “hit-and-run entry”
list of entry barriers
- sunk costs
- production barriers
- reputation
- switching costs
- tie up access
- limit pricing
- predatory pricing
- holding excess capacity
rent seeking behavior
costly activities intended to increase the chances of landing available profits
rent
excess returns above and beyond opportunity costs (i.e., economic profits)
