Chapter 6

Question 1

What is entry

Answer 1

Entry is the beginning of production and sales by a new firm in a market

Question 2

How do entrants threathen incumbents

Answer 2

1. they take market share away from incumbents
2. entry often intensifies competition, leading to lower prices

Remember: more firms imply lower prices

Question 3

What is exit

Answer 3

Exit occurs when a firm ceases to produce in a market

Question 4

What is the distinction between new and diversifying firms with regards to entry

Answer 4

A new firm is one that did not exist before it entered a market

A diversified firm is one that is active in a product or geographic market but has chosen to diversify into others

Question 5

Why is the distinction between new and diversifying firms important

Answer 5

It may affect the costs of entry and appropriate strategic response

Question 6

What are the most common entry and exit patterns

Answer 6

1.Entry and exit will be pervasive
2.Entrants and exiters tend to be smaller than established firms
3. Most entrants do not survive 10 years, but those that do grow precipitously
4.Entry and exit rate vary by industry

Question 7

What are three important implications for strategy regarding entry and exit

Answer 7

1. when planning for the future, the 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 8

What are postentry profits

Answer 8

Postentry profits are the excess of revenues over ongoing operating expenses

Question 9

What are sunk entry costs

Give an example

Answer 9

These are for example the costs of specialized capital equipment to government licences

Question 10

What is postentry competition

Answer 10

Postentry competition represents the conduct and performance of firms in the market after entry has occurred

Question 11

What determines whether there are barriers to entry

Answer 11

The sum total of the analysis of the sunk costs and post entry competition

Question 12

What does barriers to entry allow incumbents to do

Answer 12

Barriers to entry allow incumbent firms to earn positive economic profits while making it unprofitable for newcomers to enter the industry

Question 13

What are structural barriers to entry

Answer 13

Structural entry barriers exist when the incumbent has natural costs or marketing advantages, or when the incumbent benefits from favorable regulations

Question 14

What are strategic entry barriers to entry

what is the result of strategic entry barriers

Answer 14

Strategic entry barriers result when the incumbent takes aggressive actions to deter entry

Question 15

What are bain’s typology of entry conditions

Answer 15

1.Blockaded entry
2.Accommodated entry
3.Deterred entry

Question 16

Define Blockaded entry

Answer 16

Entry is blockaded if structural barriers are so high that the incumbent do nothing to deter entry. For example high sunk entry costs, or low postentry profitability

Question 17

Define Accommodated entry

Answer 17

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 18

Define Deterred entry

Answer 18

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 incumbents profits

Question 19

What are predatory acts

Answer 19

In the scenario of deterred entry; entry-deterred strategies are called predatory acts; this is because the may either raise entry costs or reduce prostentry profits

Question 20

What is the strategic distinction between entrants and incumbents

Answer 20

• Incumbents and entrants will naturally differ in financial resources and productive capabilities, but the incumbent does not neccessarily have the advantage.
• Incumbent usually have incurred sunk entry costs while entrants have not.
• Asymmetries also arise from relationships with customers and suppliers that can take years to build

Question 21

What are the three main types of structural entry barriers

Answer 21

1.Control of essential resources
2.Economies of scale and scope
3.Marketing advantages of incumbency

Question 22

Explain control of essential resources as a structural entry barrier

Answer 22

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

Question 23

Explain economies of scale and scope as a structural entry barrier

Answer 23

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

Question 24

Explaing Marketing advantages of incumbency as a structural entry barrier

Answer 24

An incumbent can exploit the umbrella effect to offset uncertainty about the quality of a new product that it is introducing, which an entrant can not.

Question 25

What are exit barriers

Answer 25

Exit barriers often stem from sunk costs, such as when firms have obligations that they must meet whether or not the cease operations

Question 26

When are entry deterring strategies worth it

Answer 26

1. The incumbent earns higher profits as a monopolist than it does as duopolist
2. The strategy changes entrants’ expections about the nature of postentry competition

Question 27

What are the three entry deterring strategies

Answer 27

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

Question 28

Explain entry deterring strategy: Limit pricing

Answer 28

Limit pricing refers to the practice whereby and incumbent firm charges a low price to discourage new firms from entering

Question 29

Is the Strategic Limit pricing rational?

Answer 29

Not really, depending cost and demand, the incumbent might be better off as a cournot duopolist that as a perpetual monopoly limit-pricer (this is when the entran hangs around indefinitly)

Question 30

Explain entry deterring strategy: predatory pricing

Answer 30

Predatory pricing occurs when a large incumbent sets a low price to drive smaller rivals from the market and to warn potential entrants.

Question 31

What is the chain-store paradox

Answer 31

The paradox is that many firms appear to engage in predatory pricing , despite the theoretical conclusion that the strategy is irrational

Question 32

What is an war of attrition

Answer 32

In a war of attrition, two or more parties expend resources battling with each other. eventually the survivor claims its rewards

Question 33

When will predatory pricing not deter entry

Answer 33

when it lacks the capacity to meet the demand of increase in customer demand

Question 34

Explain entry deterring strategy: Strategic bundling

Answer 34

Bundling occurs when a combination of goods or services is sold a price that is less than what it would cost to buy the same items separately. Example: happy meal

Question 35

What are judo economics

Answer 35

When smaller firms and potential entrants can use the incumbent’s size to their own advantage. For example slashing prices and imposing revenue destruction effect

Question 36

What is the entry deterrence checklist

Answer 36

Sunk costs
Production barriers
Reputation
Switching costs
Tie up access
Limit pricing
Predatory pricing
Holding excess capacity