6 - Entry And Exit

Question 1

Entry barriers

Answer 1

Allows incumbent to generate economic profit while making it newcomers unprofitable to entry the market.

Either raise sunk costs or reduce post-entry profitability.

1- Structural Entry Barriers (cannot influence)
2- Strategic Entry Barriers (can influence)

Question 2

Entry conditions Bain’s typology

Answer 2

• Blockaded: structural barriers are so high that deterrence is not necessary
• Accommodated Entry: entry is so attractive that incumbents should waste resources trying to prevent it
• Deterred Entry: entry-deterring stratégies (predatory acts)

Question 3

1- Structural Entry Barriers

Answer 3

1- Control is Essential Resources\Channel: protected if it can use the resource more effectively than newcomers or patents & copyrights
2- Economies of Scale and Scope: raisins the Minimum Efficient Scale of Entry
3- Marketing Advantages of Incumbency: umbrella effect but risk of major losses in case of customer disappointment

Question 4

2- Strategic Entry Barriers

Answer 4

Predatory acts if:

• the incumbent earns higher profits as a monopolist than it does as a duopolies
• the strategy changes entrants’ expectations on post-entry competition (uncertainty due to asymmetric information => stay out)

1- Limit Pricing: fear that post-envy prices will not cover sunk costs of entry
2- Predatory Pricing
3- Strategic Bundling: giving consumers little choice but to buy the entire bundle (combination of goods&services)
4- excess capacity

Question 5

War of attrition

Answer 5

If two or more parties expend resources battling with each other and if the war lasts long enough, even the winner may be worse off than when the war began because the resources it expended to win the war may exceed its ultimate reward.

Question 6

Entry barrier checklist

Answer 6

• snuck Costs
• production barrier
• reputation
• switching costs
• tie up access
• limit pricing
• predatory pricing
• holding excess capacity

Question 7

Exit Barriers

Answer 7

Firms stops production and either redeploy or sells off its assets

• snuck Costs (labor and raw material contracts)
• government regulations
• bankruptcy to avoid obligations

Question 8

Contestable market

Answer 8

When a monopolist raises prices in a contestable market a hit and run entrant enters rapidly the market, undercut the price, reaps ST profits and exits quickly before the incumbent retaliates.

Works if it can set a price high enough to offset sunk costs of entry.

Question 9

Multiple entry

Answer 9

Possible if:

• all have access to the production technology (no patent)
• the market demand is large enough

Other wise:

• take pre-emptive entry measures (lobbying gouvernement
• to obtain exclusive local rights (rent-seeking behaviour)

Question 10

Entrant distinction

Answer 10

Diversifying or new

Question 11

Judo economics

Answer 11

A change in market conditions acts in favour of the new entrant as he is still small and flexible to adapt to changes.

Question 12

Entry and exit are pervasive

Answer 12

1/3 < 5y old

1/3 will exit in the next 5y