Lecture 8

Lecture 8 - 4/30/2007 Entry Deterrence Entry into your...

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4/30/2007 1 Entry Deterrence • Entry into your market can be a very significant threat to your current and future profitability. •Two general sources of barriers to entry. 4/30/2007 – Exogenous barriers to entry (passive entry deterrence) – Endogenous barriers to entry (active entry deterrence) • Next Time: If entry deterrence isn’t possible, what can you do to “prepare” for entry? Exogenous Barriers to Entry • There are a number of factors that in themselves may prevent entry into a market. – Government regulation or patent laws. 4/30/2007 – Large sunk costs of entry. – Economies of scale – Brand loyalty, exogenous switching costs • But what if you aren’t so lucky to have these natural barriers to entry? Can you make strategic decisions to limit the possibility of entry? Endogenous Barriers to Entry • Basic Idea: Suppose you are the first business to enter into a particular market. • As the first into the market, you have a “first mover 4/30/2007 advantage”. Can you use this to take actions that will make entry less likely? • One needs to think about how your actions (investment in capacity, advertising, contracts) will affect incentives for entrants to enter.
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4/30/2007 2 Entry Deterrence Strategies - Outline Excess Capacity • Reputation 4/30/2007 • Endogenous Sunk Costs • Limit Pricing/other pricing strategies • Product Location/Proliferation Excess Capacity - I • Simple story: • Suppose you are a monopolist selling a product at reasonably high prices and making 100K/year profits. 4/30/2007 • You learn of a new potential entrant into your market. To enter, the entrant would pay a fixed cost of entry and then compete with you. You worry about the impacts on your profitability. • Suppose capacity constraints are important in this industry. Excess Capacity - II • You consider two possible strategies to take if entry does occur – –1) Accommodate entry – keep prices relatively high, preserving some profits but letting the entrant obtain a significant market share 4/30/2007 some profits but letting the entrant obtain a significant market share (suppose you anticipate that this strategy will give you profits = 50K) –2) Fight entry – invest in extra capacity (suppose this extra capacity costs 30K), lower prices, sacrificing profits but holding
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This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 8 - 4/30/2007 Entry Deterrence Entry into your...

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