Week 5 - Entry and Exit Flashcards
How do we define entrants?
As new firms that begin to produce and sell in existing markets
How does entry threaten incumbents?
- Reduces market share
- Increasing competition
- Reducing profitability
Exit has opposite effect in an industry
What elements are asymmetrical between incumbents (those within) and entrants?
- Sunk cost for incumbents is incremental cost for entrants
- Established relationships with customers and supplier not easy to replicate
- Learning curve effects
- Switching costs for customer
What does a firm do before entry into a market?
-Cost Benefit Analysis (comparing sunk cost of entry with PV of the post-entry profit stream)
What do sunk costs of entry range from?
- Investment in specialised assets to obtaining govt licences
What do post-entry profits depend upon?
Depend on demand and cost conditions as well as post-entry competition
What are some of the implication of entry and exit into/from a new market?
- Managers should account for unknown potential future competitors
- Managers of new entrant firms need to find capital to grow since survival and growth go hand in hand
- Managers should be aware of entry/exit conditions of industry and how they can change
What are barriers to entry?
Factors that:
- allow the incumbents to earn economic profit while
-making it unprofitable for the new firms to enter the industry.
How do we classify barriers to entry?
- structural barriers (natural advantages) and
- strategic barriers (incumbents’ actions to deter entry).
When do structural barriers to entry exist?
When:
- Incumbents have cost advs
- Incumbents have marketing advantages
- Incumbents protected by favourable gov policy and regulation
What are the 3 main types of ‘natural’ barriers to entry?
- Control of essential resources by the incumbent
- Econ of scale and scope
- Marketing adv of incumbency
What’s meant by control of essential resources?
Resources that incumbents have that makes it harder for entrants to face
e. g.
- Patents
- Special know-how
How can entrant be deterred by economies of scale?
If EofS significant potential entrants may face cost disadv
- Incumbent strategic reaction may be to further lower price and cut into entrants profits
(SEE GRAPH TO HELP WITH EXPLANATION)
How can entrants be deterred by economies of scope?
Cost disadvantage here too
- Econ of scope exist when multiple product lines produced in same plant
- Econ of scope in marketing due to upfront costs of achieving brand awareness by entrants
How can incumbents exploit their marketing advantage?
Exploit brand umbrella to introduce new products more easy than entrants
- Bran umbrella make it easy for incumbent to negotiate vertical channel (e.g easier to get shelf space with established brand)
How can barriers to exit affect strategy
(SEE GRAPH)
essentially need to think twice about entering market