Installment_06

1. Blockaded entry

2. Accommodated entry

3. Deterred entry

• Entry is blockaded when conditions in the market make it extremely difficult to enter a market for a new firm

• Causes:

  • High natural barriers just like fixed costs or economies of scale

  • Regulatory barriers just like laws or government regulations

  • Technological dominance just like patents which are held by other firms

• entry is relatively easy because it doesn’t harm the profits of existing firms

• Causes:

  • Market is large enough

  • Low entry barriers just like low fixed costs or easily accessible technology

• Other firms actively prevent the entry because new competitors would threaten their market position or profits

• Causes:

  • Intense competition

• incumbents already operate in the market and have established resources, customer relationships and market knowledge

• Entrants are newcomers and often face higher uncertainties, entry costs and the challenge of competing with well-established players

• sunk entry costs

  • Definition: Sunk costs are expenses that entrants must pay to enter the market but cannot recover if they fail (e.g. Research and development costs)

  • Impact: high sunk costs deter new entrants, giving incumbent firms a significant advantage since their sunk costs have already been absorbed

• Relationship with costumers and stakeholders

  • Impact: entrants often struggle to build similar relationships quickly, making it harder to compete effectively

• Path dependencies and Lock-ins

1. Control of essential Resources

   • incumbents control critical resources that are necessary to operate in the market, making it difficult for new entrants to compete

2. Economies of Scale and Scope

   • incumbents benefit from cost advantages due to large-scale operations or the ability to produce a variety of goods efficiently (economies of scope)

   • Entrants must either achieve similar economies of scale or operate at a disadvantage with higher costs

3. Marketing Advantages of Incumbency

   • incumbents have established strong brands and customer loyalty which create significant entry barriers for new firms

   • Advantages:

     • Brand recognition

     • Advertising budgets

     • Customer loyalty

Incumbent firms use this strategy by setting prices so low, that entry becomes unprofitable or unattractive for new firms

• incumbents set prices below profit-maximizing level to discourage entrants, they want the market to look unprofitable

• Higher earnings than under Cournot Doupoly (situation where 2 firms compete on quantities")

  • Incumbent sacrifices some short-term profits to avoid competition entirely, which leads to long-term profit

• information asymmetry

  • Entrants may have better information about market demand or costs and realize that they can compete profitably despite the low prices

• Entrants innovation

  • entrants could find ways to innovate or operate more efficiently, allowing them to compete at low price levels

• Regulatory issues

  • Strategy of incumbents could be considered anti-competitive and could attract scrutiny (Aufmerksamkeit) from regulators

• Short-term nature

  • limit pricing only works temporarily

It refers to an aggressive strategy where an incumbent firm sets prices below costs to force competitors out of market and deter new entrants. This aims to establish or maintain market dominance by eliminating rivals and creating entry barriers

• legal risks

  • predatory pricing is often illegal

• Sustainability

  • risk of unsustainable losses if rivals refuse to exit or if new competitors enter later

• Recoupment uncertainty

  • Once competitors are driven out, raising prices may attract new competitors back into the market