Lecnotes09 - ECON 696: Managerial Economics and Strategy...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 696: Managerial Economics and Strategy Lecture Notes 9: Entry and Exit The previous few chapters have looked at how firms deal with each other, both strategically and tactically, while they're operating. This chapter discusses the conditions under which firms enter and leave markets. The textbook first covers the market characteristics most important in entry and exit decisions and most important in determining the likely profitability of new entrants. The textbook then turns its attention to strategies incumbent firms (firms already in the market) may use in attempting to prevent the entry of new firms, some of which appear sensible only under some very specific assumptions. The most important things a potential entrant should consider before entering a market are the barriers to entry that may be in place, the cost of overcoming these barriers, and the potential for profits in the industry once they have entered. In fact, the competitive environment may be quite different once the entrant has started operating in a market. Barriers to Entry Barriers to entry are factors that keep potential entrants from entering an industry in which incumbent firms are making positive economic profits. That is, the firms already in an industry are earning an unusually large return on their investment but some barriers keep new firms from coming in. Barriers to entry may be structural or strategic . Structural barriers exist in an industry independent of any behavior taken by an incumbent firm toward an entrant, or even a potential entrant. Strategic barriers exist because incumbent firms can be reasonably expected to respond aggressively to any attempts at entry. The level of these barriers is described by Bain's Typology: 1. Blockaded entry describes a situation where there are sufficient structural barriers in place so that incumbent firms need take no action in order to prevent entry. Something about the market just makes it impossible for new firms to enter profitably. 2. Accommodated entry describes a situation where the structural barriers are so low and the cost of any sort of strategic reaction is so high that incumbent firms can do nothing but accept and accommodate new entrants. Aggressive reactions simply make no sense. 3. Deterred entry describes a situation where barriers to entry are sufficiently high that incumbents, through some aggressive or predatory acts , can keep a potential entrant out
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
and will enjoy greater profits, even considering the cost of the predatory acts, by doing so. The book discusses three classes of structural barriers to entry: 1. Control of essential resources means that a firm owns something critical to producing and selling in a market. This might be a natural resource, a transit route, a patent or a trade secret. By excluding other firms from use of that resource, and incumbent firm can prevent any new firm from entering profitably.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/04/2012 for the course ECO 696 taught by Professor Staff during the Fall '11 term at Metropolitan NY.

Page1 / 6

Lecnotes09 - ECON 696: Managerial Economics and Strategy...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online