Entry and Exit
Entrants threaten incumbents in two ways: First, they take market share away from incumbents. Second, entry often intensifies competition, leading to lower prices. This is a natural consequence of the Cournot and differentiated Bertrand models in which more firms imply lower prices.
Some Facts about Entry and Exit
There are three important implications for strategy:
1. When planning for the future, the managers must account for entry.
2. Managers should expect most new ventures to fail quickly.
3. Managers should know the entry and exit conditions of their industry.
Entry and Exit Decisions: Basic Concepts
The entrant must sink some capital that ...view middle of the document...
It is typical in markets with growing demand or rapid capital improvements. Entry is so attractive in such markets that the incumbent(s) should not waste resources trying to prevent it.
* 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 acts).
If entry is blockaded or accommodated, the firm should not make any effort to deter entry. If blockaded, the effort is superfluous; if accommodated the effort is wasted.
Analyzing Entry Conditions: The Asymmetry Requirement
Incumbents and entrants will naturally differ in financial resources and productive capabilities, but the incumbent does not necessarily have the advantage. Incumbents usually have incurred sunk entry costs while entrants have not. Asymmetries also arises from relationships with customers and suppliers that can take years to build. As we discuss entry barriers, bear in mind that entrants enjoy many of the attributes what we normally associate with the incumbent firm. Diversifying entrants are particularly likely to have sunk investments in facilities, tools, and training and have established relationships in the vertical chain of production.
Structural Entry Barriers
There are three main types of structural entry barriers:
* Control of essential resources
An incumbent is protected from entry if it controls a resource or channel in the vertical chain and can use that resource more effectively than newcomers. Some firms attempt to purchase the resources and channels in the vertical chain, preventing potential entrants from acquiring raw materials and/ or getting final goods to market. Firms that attempt to secure their incumbency by tying up the vertical chain face several risks. First, substitutes can emerge. Second, new channels can open. Third, the price to acquire other firms in the vertical chain can be excessive. Finally, firms that attempt to tie up channels via acquisition may face antitrust challenges. Incumbents can legally erect entry barriers by obtaining patents to novel and non-obvious products or production processes. Entrants can try to “invent around” existing patents. This strategy can succeed because a government patent office sometimes cannot fully distinguish between a new product and an imitation of a protected product and also because courts may be reluctant to limit competition. Incumbents may not require patents to protect specialized know-how. Rivals may turn to the legally and ethically questionable practice of industrial espionage to steal such information.
* Economies of scale and scope
When economies of scale are significant, established firms operating at or beyond the minimum efficient scale (MES) will have substantial cost advantage over smaller entrants. This analysis presumes that there is some asymmetry giving the incumbent the advantage in market...