Chapter 6

Question 1

What are three important implications for strategy:

Answer 1

1. Manager 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.

Question 2

What are Bain’s Typology of Entry Conditions:

Answer 2

1. Blockaded Entry
2. Accomondated entry
3. Deterred Entry

Question 3

What is a blockaded entry?

Answer 3

Entry is blockaded if structural barriers are so high that the incumbent need do nothing to deter entry.

Question 4

What is an accommodated entry?

Answer 4

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.

Question 5

What is a deterred entry?

Answer 5

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

Question 6

What are structural entry barriers?

Answer 6

• Control of essential resources
• Economies of scale and scope
• Marketing advantages of incumbency

Question 7

When will firms exit a market?

Answer 7

if the P(exit) < P(entry)

Question 8

What are the barriers to exit?

Answer 8

Sunk costs and governments

Question 9

When to consider entry-deterring strategies?

Answer 9

1. The incumbent earns higher profits as a monopolist than it does as a duopolist.
2. 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

Question 10

What are three entry-deterring strategies?

Answer 10

1. Limit pricing
2. Predatory pricing
3. Strategic bundling

Question 11

What is limit pricing?

Answer 11

Incumbent charges a low price to discourage new firms from entering.

Question 12

Is limit pricing rational?

Answer 12

Limit pricing fails because the incumbent’s pre-entry pricing does not influence the entrant’s expectations about post-entry competition.

Question 13

What is predatory pricing?

Answer 13

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.

Question 14

What is strategic bundling?

Answer 14

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.

Question 15

What is judo economics?

Answer 15

Smaller firms and potential entrants can use the incumbent’s size to their own advantage.

Question 16

What are the 8 entry barriers

Answer 16

1. Sunk costs
2. Production barriers
3. Reputation
4. Switching costs
5. Tie up access
6. Limit pricing
7. Predatory pricing
8. Holding excess capacity

Question 17

What is rent-seeking behavior?

Answer 17

Costly activities intended to increase the chances of landing available profits.
E.g., lobbying by the government for legislations.

Question 18

What is the chain-store paradox?

Answer 18

The paradox is that many firms appear to engage in predatory pricing.

Question 19

What conditions have to be met when for an incumbent form to successfully deter entry by holding excess capacity?

Answer 19

1. The incumbent should have a sustainable cost advantage. This gives it an edge in the event of entry and a price war.
2. Market demand growth is slow.
3. The invest in excess capacity must be sunk prior to entry.

Question 20

What are entry-deterring strategies that create high entry costs?

Answer 20

1. Aggressive price reductions to move down the learning curve
2. Intensive advertising to create brand loyalty
3. Acquisition of patents for all variants of a product

Question 21

What are entry-deterring strategies that change an entrant’s expectation of post-entry competition?

Answer 21

1. Enhancement of firm’s reputation for predation through the announcement
2. Limit pricing
3. Holding of excess capacity