4. Firms often try to persuade governments to impose entry restrictions through patents, regulations, and licenses. In the U.S., AT&T fought with the government for many years to prevent other providers of long distance telephone service from entering the market. Similarly, the local Bell operating companies have lobbied the federal government to write laws to make it difficult for other firms to provide local phone service. Several factors influence how long specific barriers to entry are effective at preventing the entry of competitors into an industry.
Solutions – Chapter 2 8 • Economies of scale depend on the size and growth of the market. If a market is growing quickly, a competitor could build a larger plant capable of producing at a cost lower than the incumbent. If a market is flat, there may not be enough demand to support additional production at the efficient scale, which forces new entrants to have higher costs. • Absolute cost advantages depend on competitors’ difficulty in designing better processes. Some processes receive legal protection from patents. Entrants must either wait for the patent to expire or bear the expense of trying to invest around the patent. Similarly, differentiation advantages last only so long as a firm continues to invest in differentiation and it is difficult for other firms to replicate the same differentiated product or service. • Incumbent firms and potential entrants can both lobby the government. If potential entrants launch intensive lobbying and public interest campaigns, laws, regulations, and rules can change to ease entry into a once-protected industry. Several recent examples in Europe are deregulation of the airline and banking industries. Question 9. Explain why you agree or disagree with each of the following statements. a. It’s better to be a differentiator than a cost leader, since you can then charge premium prices. Disagree. While it is true that differentiators can charge higher prices compared to cost leaders, both strategies can be equally profitable. Differentiation is expensive to develop and maintain. It often requires significant company investment in research and development, engineering, training, and marketing. Consequently, it is more expensive for companies to provide goods and services under a differentiated strategy. Thus, profitability of a firm using the differentiated strategy depends on being able to produce differentiated products or services at a cost lower than the premium price. On the other hand, the cost leadership strategy can be very profitable for companies. A cost leader will often be able to maintain larger margins and higher turnover than its nearest competitors. If a company’s competitors have higher costs but match the cost leader’s prices, the competitors will be forced to have lower margins. Competitors that choose to keep prices higher and maintain margins will lose market share. Hence, being a cost leader can be just as profitable as being a differentiator.
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