What are three important implications for strategy:
- Manager must account for entry
- Managers should expect most new ventures to fail quickly
- Managers should know the entry and exit conditions of their industry.
What are Bain’s Typology of Entry Conditions:
- Blockaded Entry
- Accomondated entry
- Deterred Entry
What is a blockaded entry?
Entry is blockaded if structural barriers are so high that the incumbent need do nothing to deter entry.
What is an accommodated entry?
Entry is accommodated if structural entry barriers are low, and either (a) entry-deterring strategies will be ineffective or (b) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out.
What is a deterred entry?
Entry is deterred (a) if the incumbent can keep the entrant out by employing an entry-deterring strategy, and (b) if employing the entry-deterring strategy boosts the incumbent’s profits. = predatory
What are structural entry barriers?
- Control of essential resources
- Economies of scale and scope
- Marketing advantages of incumbency
When will firms exit a market?
if the P(exit) < P(entry)
What are the barriers to exit?
Sunk costs and governments
When to consider entry-deterring strategies?
- The incumbent earns higher profits as a monopolist than it does as a duopolist.
- The strategy changes entrants’ expectations about the nature of postentry competition.
incumbent firm aims to create the perception that the postentry competition in the market will be intense and potentially unprofitable for new entrants
What are three entry-deterring strategies?
- Limit pricing
- Predatory pricing
- Strategic bundling
What is limit pricing?
Incumbent charges a low price to discourage new firms from entering.
Is limit pricing rational?
Limit pricing fails because the incumbent’s pre-entry pricing does not influence the entrant’s expectations about post-entry competition.
What is predatory pricing?
Large incumbent sets a low price to drive smaller rivals from the market.
The purpose of predatory pricing is twofold: to drive out current rivals and to make future rivals think twice about an entry.
What is strategic bundling?
Bundling occurs when a combination of goods or services is sold at a price that is less than what it would cost to buy the same items separately.
What is judo economics?
Smaller firms and potential entrants can use the incumbent’s size to their own advantage.
What are the 8 entry barriers
- Sunk costs
- Production barriers
- Reputation
- Switching costs
- Tie up access
- Limit pricing
- Predatory pricing
- Holding excess capacity
What is rent-seeking behavior?
Costly activities intended to increase the chances of landing available profits.
E.g., lobbying by the government for legislations.
What is the chain-store paradox?
The paradox is that many firms appear to engage in predatory pricing.
What conditions have to be met when for an incumbent form to successfully deter entry by holding excess capacity?
- The incumbent should have a sustainable cost advantage. This gives it an edge in the event of entry and a price war.
- Market demand growth is slow.
- The invest in excess capacity must be sunk prior to entry.
What are entry-deterring strategies that create high entry costs?
- Aggressive price reductions to move down the learning curve
- Intensive advertising to create brand loyalty
- Acquisition of patents for all variants of a product
What are entry-deterring strategies that change an entrant’s expectation of post-entry competition?
- Enhancement of firm’s reputation for predation through the announcement
- Limit pricing
- Holding of excess capacity
