Entry/Exit .3, .4 Flashcards
Why does irreversible investment deter entry?
assumes a sequential game where the first mover (I) has an advantage. by investing greater in capacity (output) to lower price => little incentive for the entrant to produce less at a lower price for less profits.
‘burning ones bridge’ as an act of commitment to the market to deter and portrays lower marginal costs
when would a firm deter entry? when would a firm accommodate entry? when would firms blockade?
dependent on enry costs
Blockade= entry costs are sufficiently high such thatno entry happens and I earns monopoly profits
If intermediate costs, the I expands investment in capacity large enough to scare E and signal commitment
if low costs, I accommodate E as raising capital investment as a deterrent won’t be profitable, E’s reaction function taken into account
why might investment not deter entry?
RElaxation of bain-sylos postulate: limit p theory states that firms may sustain a price
so low that it discourages entry however, firms wont change their behaviour after entry
However, this is not rational. Overaccumulation wont occur as it would act as self-sabotage stretching I too thin. Overinvestment won’t act as credible threat and wont be profitable for the I.
in cournot equil. medium and high investment produce the same result
extension: with uncertain demand, it can act as a deterrent
name a few deterrent strategies for I against E
-raising wages => increasing E labour costs
-Developing clientele=> lower E demand
-exclusive distributions=>distribution costs
-strategic locations (hotelling)
-bundling
-lobby to raise taxes
-deutsche post (min wage increase example)
-informative ad vs persuasive ad ‘tough/soft’
if I overinvest to a level where E earns negative profits it looks ‘tough’ and vice versa ‘soft’
trade-off between self-harm and entrant harm
why might firms increase product variety?
hotelling model of prefernecs [0,1]
if firms offer multi products they can better capture a range of preferences and deter entrants from capture a unique preference.
e.g cereals
increasing variety can decrease entry threats (if E has new tech, innovative process itr may enter)
why do existing products have little commitment value? (multiproduct vs one product)
if multiproduct firms compete against a one-product firm. the multiproduct firm has less commitment to the market if prices are low and depresses the demand of its other products - judds insight
