Entry

Question 1

defines entry as conditions that allow established firms or incumbents to earn abnormal profits without attracting entry

Answer 1

Bain (1956)

Question 2

“a cost of producing which is borne by firm seeking to enter an industry but is not borne by firms already in an industry”.

Answer 2

Stigler (1968)

Question 3

• Study of entry barriers began formally with Bain (1956), identifies the three main sources of barriers to entry:

Answer 3

 Economies of scale
 Absolute cost advantage
 Product differentiation

Question 4

produces evidence of economies of scale as barriers to entry across European industries.

Answer 4

Pratten (1968)

Question 5

 Is that entrants assume that incumbent will maintain its level of output after entry

Answer 5

Sylos postulate–> Sylos-Labini (1962)

Question 6

criticised limit pricing on the following grounds:
 Why is it more profitable to restrict all entry
 0 conjectural variation assumption is unrealistic
 Growing industries, hard to persuade entrant there is no point in entering
 Market structure is ignored, applied to the case of oligopoly, all incumbent firms would implement a limit pricing strategy. For this strategy to succeed high levels of collusion or coordination would be required
 Implies perfect information regarding the market demand function, the incumbent’s own costs and so on. These would be impossible to predict with any degree of precision; where incumbent charges a price below entrant until entrant withdraws
 Depends on status of entrant, if they’re big they may seek to accommodate.

Answer 6

Stigler (1968)

Question 7

General food’s aggressive behaviour. i.e. setting price of Maxwell house coffee below MC and AC deterred proctor and gamble entering the market

Answer 7

Hilke and Nelson (1969)

Question 8

European commission ruled that Wanadoo was guilty of predatory pricing in European ADSL high speed internet access market

Answer 8

July 2003

Question 9

Chicago cricticisms:

Answer 9

• Hard to know if it is a critical conditional (long run profits will exceed losses made by predatory behaviour) will be met
• Has to convince rival it is prepared to maintain losses for as long as it stays in industry
• Has to be convinced that once it drives rival out entry threat is gone
• Identical cost functions, strategy could be used against predator.

Question 10

Hard to prove. 26 cases of predatory competition, only clear economic evidence of 6.

Answer 10

Koller (1975)

Question 11

uses a game theoretic model to describe situation in which an incumbent firm attempts to deter entry by deliberately increasing sunk cost expenditure before entry takes place. It is irreversible and visible to entrant, the investment in excess capacity

Answer 11

Dixit (1982)

Question 12

in a repeated period game there may be reason for incumbent to fight.
 However, model unravels if there is a limit to the number of times the game is repeated reputation then becomes unimportant even if there is incentive to cheat.

Answer 12

Dixit (1982)

Question 13

 Deters entrants from developing similar products, as they may anticipate it to be unproductive to do so.

Answer 13

Microsoft Word 2000 promised in 1997

Question 14

58% of respondents reported frequent use of strategy to deter entry into mature markets.
• For existing products, most common entry deterring strategies:
 Filling all product niches – 79%
 Masking profitability of division – 79%
 Advertising to limit entry – 78%
• Least common
 Maintenance of excess production capacity – 38%
• Most common amongst manufacturing firms
 Masking division profitability
 Patent activities
• Most common amongst service firms
 Advertising to create brand loyalties

Answer 14

• Smiley (1988)

Question 15

Questionnaire to firms in: (i) Food & Drink; (ii) Electrical Engineering: (iii) Chemicals and Pharmaceuticals.
• Most common entry deterring strategies:
 R&D departments to develop new products to fill gaps – 48%
 Promotional campaign intensified when competitors’ new product appears – 26%
• Least common
 Creation of excess capacity to deter entry – 7%
 Pricing policy directed at new entry – 6%

Answer 15

Singh et al (1998)