Chapter 6 - entry and exit

Question 1

dynamics of competition

Answer 1

how business decisions evolve over time

Question 2

contestable market

Answer 2

a market where the mere threat of entry can limit the incumbent’s ability to raise prices

Question 3

entry as an investment

Answer 3

entrant hopes that post-entry profits > sunk entry costs

Question 4

post-entry costs

Answer 4

the excess of revenues over ongoing operating expenses

Question 5

post-entry competition

Answer 5

conduct and performance of firms in the market after entry

Question 6

barriers to entry

Answer 6

allow incumbents to earn positive economic profits while making it unprofitable for newcomers to enter the industry

Question 7

two forms of entry barriers

Answer 7

• structural

- strategic

Question 8

structural barriers

Answer 8

incumbent has natural cost or marketing advantages or favorable regulations

Question 9

strategic barriers

Answer 9

incumbent takes aggressive actions to deter entry

Question 10

Bain’s typology of entry conditions

Answer 10

• blockaded entry
• accommodated entry
• deterred entry

Question 11

blockaded entry

Answer 11

if structural barriers are so high that the incumbent need do nothing to deter entry

Question 12

accommodated entry

Answer 12

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

Question 13

deterred entry

Answer 13

• 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

Question 14

predatory acts

Answer 14

entry-deterring strategies that increase entry costs or reduce post-entry profits

Question 15

three main types of structural barriers

Answer 15

• control of essential resources
• economies of scale and scope
• marketing advantages of incumbency

Question 16

exit barriers

Answer 16

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

Question 17

entry price

Answer 17

the price at which the firm is indifferent between entering the industry and staying out

Question 18

entry deterring strategies

Answer 18

• limit pricing

- predatory pricing

Question 19

limit pricing

Answer 19

the practice whereby an incumbent charges a low price to discourage new firms from entering

Question 20

predatory pricing

Answer 20

when a large incumbent sets a low price to drive smaller rivals from the market

Question 21

chain-store paradox

Answer 21

many firms appear to engage in predatory pricing, despite the theoretical conclusions that the strategy is irrational –> importance of asymmetry in knowledge

Question 22

wars of attrition

Answer 22

two or more parties expend resources battling with each other

Question 23

strategic bundling

Answer 23

a combination of goods/services is sold at a price that is less than what it would cost to buy the same items separately

Question 24

judo economics

Answer 24

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

Question 25

theory of contestable markets

Answer 25

the mere threat of entry can force the incumbent to lower prices.

–> key requirement: “hit-and-run entry”

Question 26

list of entry barriers

Answer 26

• sunk costs
• production barriers
• reputation
• switching costs
• tie up access
• limit pricing
• predatory pricing
• holding excess capacity

Question 27

rent seeking behavior

Answer 27

costly activities intended to increase the chances of landing available profits

Question 28

rent

Answer 28

excess returns above and beyond opportunity costs (i.e., economic profits)