unit seven.pptx - Entry deterrence entry accommodation and...

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Entry deterrence, entry accommodation and predation
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Learning outcomes By the end of this chapter, and having completed the Essential reading and activities, you should be able to: explain the notions of strategic substitutes and strategic complements analyse simple models with sequential actions and describe first-mover advantages in these models explain under what conditions a firm may be able and/or willing to deter the entry of a potential rival use reaction functions to analyse strategic investment decisions by firms in situations where the investment influences the firms’ future profit functions analyse firms’ predatory tactics (i.e. behaviour that aims to induce exit of competitors).
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Introduction One of the most interesting aspects of competition among firms is the use of irreversible actions that affect the future behaviour both of the firm that takes the action and of its rivals. In this chapter we examine a variety of strategic situations involving first-mover advantages, strategies to deter entry, and strategies to increase future profit by undertaking a costly and not easily reversible action today.
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A common theme in all these situations is that it may be profitable for a firm to limit its own flexibility by making a ‘commitment’, that is a long-run (difficult to change) decision, because in this way it influences the behaviour of its rivals. Of course, if a firm cannot influence the behaviour of its rivals, it will never find it profitable to limit its own flexibility. This would be the case if the commitment cannot be observed by the rivals.
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predation , a strategy that involves a reduction in profit or even a loss in the short run in order to drive competitors out of the market so that larger profits can be made in the long run. There are four elements of market structure that affect the ability of established firms to prevent supranormal profits from being eroded by entry
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1. Economies of scale; if the minimmum efficient scale is a significant proportion of the industry demand, the market can sustain only a small number of firms that make supranormal profits without inviting entry 2. Absolute cost advantage; the established firms may own superior production techniques learned through experience or through research and development. They may have accumulated capital that reduces their cost of production. They may also have foreclosed the entrants access to crucial inputs through contracts with suppliers.
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3. product differentiation advantages; incumbents may have patented product innovations or they may have cornered the right niches in the product space or they may enjoy consumer loyalty 4. capital requirements; entrants may have trouble finding financing for their investment because of the risk to the creditors. Entrants may be prevented from growing as incumbents inflict losses on them in the product market in order to reduce their ability to find financing for new investments.
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