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Copyright?2010JohnWiley&Sons,Inc.
Instructor’sManualtoaccompanyEconomicsofStrategy,FifthEdition
CHAPTER11:EntryandExit
CHAPTEROUTLINE
1)Introduction
2)SomeFactsAboutEntryandExit
3)EntryandExitDecisions:BasicConcepts
?BarrierstoEntry
?Bain’sTypologyofEntryConditions
?AnalyzingEntryConditions:TheAsymmetryRequirementExample11.1:Hyundai’sEntryintotheSteelIndustry
?StructuralEntryBarriers
Example11.2:EmiratesAir
?BarrierstoExit
4)Entry-DeterringStrategies
?LimitPricing
Example11.3:LimitPricingbyBrazilianCementManufacturers
?IsStrategicLimitPricingRational?
Example11.4:EntryBarriersandProfitabilityintheJapaneseBrewingIndustry?PredatoryPricing
?TheChain-StoreParadox
?RescuingLimitPricingandPredation:TheImportanceofUncertaintyandReputationExample11.5:PredatoryPricingintheLaboratory
?CapacityExpansion
?“JudoEconomics”andthe“Puppy-DogPloy”
5)Exit-PromotingStrategies
?WarsofAttrition
Example11.6:Wal-MartEntersGermany…andExits
6)EvidenceonEntry-DeterringBehavior
?AnEntry-DeterrenceChecklist
?SurveyDataonEntryDeterrence
7)ChapterSummary
8)Questions
9)Endnotes
CHAPTERSUMMARY
Thefocusofthischapterisonthedynamicsofentryandexitinthemarketplace.Ingeneral,entrantsintoanindustryreducethemarketshareoffirmsintheindustryandintensifycompetitionthroughproductintroductionandpricecompetition.This,inturn,reducesprofitsforallcompetingfirmsintheindustry.
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Likewise,whenafirmexitsanindustry,marketshareforremainingfirmsisincreased,priceandproductcompetitionisreduced,andprofitsincrease.
Afirmwillenteramarketifthenetpresentvalueofexpectedpost-entryprofitsexceedsthesunkcostsofentry.Afirmwouldexitamarketiftheexpectedfuturelossesexceedthesunkcostsofexit.Factorsthatreducethelikelihoodofentry/exitarecalledentry/exitbarriers.
Thestructuralentrybarriersresultfromexogenousmarketforces.Thesearethebarriersthatcannotbeinfluencedbyincumbentsfirms.Low-demand,high-capitalrequirementsandlimitedaccesstoresourcesareallexamplesofstructuralentrybarriers.Exitbarriersarisewhenfirmshaveobligationsthattheymustkeepwhethertheyproduceornot.Examplesofsuchobligationsincludelaboragreementsandcommitmentstopurchaserawmaterials,obligationstoinputsuppliersandrelationship-specificinvestments.
Thechaptercontainsadiscussionofthestrategiesthatincumbentsusetodeterentryorhastenexitbycompetitors.Limitpricing,predatorypricing,andcapacityexpansionchangeentrants’forecastsoftheprofitabilityofpost-entrycompetitionandthusreducethethreatofentryand/orpromoteexit.
Limitpricingreferstothepracticewherebyanincumbentfirmcandiscourageentrybyitsabilitytosustainalowpriceuponfacingentry,whilesettingahigherpricewhenentryisnotimminent.Predatorypricingisthepracticeofsettingapricewiththeobjectiveofdrivingnewentrantsorincumbentfirmsoutoftheindustry.Limitpricingandpredatorypricingstrategiescansucceedonlyiftheentrantisuncertainaboutthenatureofpost-entrycompetition.
Firmsmayalsochoosetoholdexcesscapacitythatservesasacrediblecommitmentthattheincumbentwillexpandoutputshouldentryoccur.
Thenextsectionprovidesadiscussionofexit-promotingstrategies.Inparticular,thesectioncontainsanexampleofhowStandardOilin1870dominatedtherefiningindustrythroughpredatorypricing.StandardOil,Toyota,andWal-Marthaveallbeenaccusedofslashingpricesbelowcosttoeliminatecompetition.Pricewarsareexamplesofwarsofattrition,wherelargerfirmsengageinpricewars,harmfultotheindustryprofits,todriveoutcompetition.Suchtacticsareusedbyfirmsthatbelievethattheycanoutlasttheirrivals.
Diversificationcanhelporhurtentrywhenproductsarerelatedthrougheconomiesofscope.Diversifiedfirmsmayenjoyeconomiesofscopeinproduction,distribution,andmarketing.Entrycostsofdiversifiedfirmstendtobelowerthanstartupfirmssincetheyarelargerandhaveaccesstolowercostcapital.Adiversifiedfirmcanbettercoordinatepricingacrossrelatedproducts,butmaybevulnerableifpricewarinonemarketcutsintoitsprofitsinasubstituteproductmarket.
Thelastsectionofthischapterdiscussessurveyofproductmanagersabouttheiruseofentrydeterringstrategies.Productmanagersreportedthattheyrelymuchmoreonentry-deterringstrategies(aggressivepricereduction,intenseadvertisingtocreatebrandloyalty,andacquiringpatents)thanstrategiesthataffecttheentrant’sperception(enhancingfirmsreputationthroughannouncements,limitpricing,and
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holdingexcesscapacity).Managersalsoreportedthattheyaremorelikelytopursueentry-deterringstrategiesfornewproductsthanforexistingproducts.
APPROACHESTOTEACHINGTHISCHAPTER
ParticularAttentionMustBePaidToTheFollowingConcepts:
?Entryreducesshare,increasescompetition,andreducesprofits.Exithastheinverseeffects.
?Barrierstoentryareamajorfactorinevaluatingentryconditionsintoamarket.Thecasestudiesandexamplesinthetexthelpthestudentidentifythedifferenttypesofbarriers.Itisimportantthestudentbeabletonotonlyunderstandthebarrierstoentryintheexamplesbuttoalsobeabletoapplythisknowledgetootherindustries.
?Post-entrycompetitionishowentrantsassesstheirwillingnesstoenteramarket.Thusincumbentfirmsmayuseentrance-deterringstrategiestoavertentrancebynewfirms.
?Studentsmustunderstandtheassumptionsunderwhichlimitpricingwillandwillnotwork.
Assumingthatafirmconsideringenteringamarkethasperfectmarketinformation,limitpricingwouldneverworkforanincumbentfirm.Itisonlywhentheentrantisunsureaboutthelevelofpost-entrypricesthatlimitpricingmaywork.
?Inorderforafirmtomakeasuccessfulentranceintoamarketitmustbeabletorecognizeawidehostofbarrierstoentryandanticipatethemanyscenariosofpost-entrybehaviorbytheentrant’scompetitors.
DEFINITIONS
AccommodatedEntry:Existsifstructuralentrybarriersarelowandeither(1)entry-deterringstrategieswouldbeineffective;or(2)thecosttoincumbentsoftryingtodeterentryexceedsthepotentialbenefitsfromkeepingentrantsout.
BlockadedEntry:Existsifincumbentsneednotundertakeanyentry-deterringstrategiestodeterentry.Blockadedentrymayresultwhentherearestructuralentrybarriers,orifentrantsexpectunfavorablepost-entrycompetition,perhapsbecausetheentrants’productionisundifferentiatedfromthatoftheincumbents.
DeterredEntry:Existswhenincumbentscankeepentrantsoutusingentry-deterringstrategies.
Entry:Occursasnewfirmsbeginproductionandsalesinamarket.Entrycanoccurundertwodifferentsituations:(a)bynewfirms,thatwerepreviouslynotintheindustry,or(b)diversifyingfirms,whicharefirmsthatwereinbusiness,butwerenotpreviouslydoingbusinessinthatmarket.
Exit:Occurswhenafirmceasestoproduceinamarket.Exitfromanindustryoccurswhenafirmceasestooperatecompletelyorcontinuestooperateinothermarketsbutwithdrawsitsproductofferingsfromtheindustryunderconsideration.Toexitanindustry,afirmstopsproductionandeitherredeploysorsellsoffitsassets.
Incumbent:Firmthatisalreadyinoperationinamarket.
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LimitPricing:Referstothepracticewherebyanincumbentfirmcandiscourageentrybychargingalowpricebeforeentryoccurs.Theentrant,observingthelowpricesetbytheincumbent,infersthatpost-entrypricewouldbeasloworevenlower,andthatentryintothemarketwouldthereforebeunprofitable.
PerfectlyContestable:Describestheconditionwhenamonopolistcannotraisepricesabovecompetitivelevels.Intheory,thethreatofentrycanconstrainamonopolistfromraisingprices.
Post-entryCompetition:Theconductandperformanceoffirmsafterentryhasoccurred.
PredatoryActs:Entrydeterringstrategiesbyanincumbentthatappeartoreduceitsprofits,untiloneaccountsfortheadditionalprofitsthatitearnsbecausetheactsdeterentryorpromoteexitbycompetitors.
PredatoryPricing:Referstothepracticeofsettingpricewiththeobjectiveofdrivingnewentrantsor
existingfirmsoutofbusiness.
StrategicEntryBarriers:Existswhenincumbentfirmstakeexplicitactionsaimedatdeterringentry.Entry-deterringstrategiesincludecapacityexpansion,limitpricing,andpredatorypricing.
StructuralEntryBarriers:Resultwhenincumbentshavenaturalcostormarketingadvantages,orbenefitsfromfavorableregulations.Lowdemand,high-capitalrequirementsandlimitedaccesstoresourcesareallexamplesofstructuralentrybarriers.
SUGGESTEDHARVARDCASESTUDIES1
Caterpillar(HBS9-385-276).Thiscasedescribesthestructureandevolutionoftheearthmovingequipmentindustryworldwideinthepostwarera,particularlyfocusingondevelopmentsinthe1980sand1970s.DescribesCaterpillar’sstrategyinbecomingthedominantworldwidecompetitorwithindustrymarketshareexceeding50%.IncludesdetailsonCAT’smanufacturing,marketingresearchanddevelopment,andorganizationalpolicies.Concludeswithadescriptionofsomeenvironmentalchangesoccurringintheearly1980’s,andraisesthequestionofhowthesemightaffectCaterpillarTractorCo.’srecord1981performanceandrequirechangesinitshighlysuccessfulstrategy.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:
a)DescribethekeydriverstoCaterpillar’shistoricalsuccess.
b)DescribechangesinthecompetitiveenvironmentandexplainhowthesechangesmightimpactCAT.
DeBeersConsolidatedMines(HBS9-391-076).ThiscasedescribestheproblemsfacingDeBeersatthestartof1983.DeBeershad,sinceitsformationin1888,exercisedalargemeasureofcontrolovertheworldsupplyofdiamonds.In1983,thecompanyitselfminedover40%oftheworld’snaturaldiamondsand,throughmarketingarrangementswithotherproducers,distributedover70%.For50yearsupto1983thecompanyneverlowereditspricesand,overall,hadraisedthemsignificantlyaheadoftherateofinflation.However,in1983thecompanywasfacedwithaseriesofproblemsthatthreatenedthestructureithadsocarefullybuilt.FirstalargeproducingnationhadstoppedsellingthroughDeBeers.Second,newdiscoveriesmeantthattheannualsupplyofmineddiamondswoulddoubleby1986.Finally,theindustrywasexperiencingitsworstslumpsincethe1930s,resultinginasignificantdeteriorationin
1ThesedescriptionshavebeenadaptedfromHarvardBusinessSchoolCatalogofTeachingMaterials.
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thecompany’sfinancialposition.ItalsodescribesthestructureandeconomicsofthediamondindustryandasksthestudenttodecidewhetherornotDeBeersshouldabandonthebusinessstrategyithadpursuedfornearlyacentury.Thiscasecanbetaughtwithsomecombinationofthefollowingchapters:2,8,13,14and16.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:
a)Whatarethecharacteristicsofroughdiamondsthatcreatechallengesinsustainingamonopolyofthistrade?
b)WhydoesDeBeersrequiredifferentcountriestopaydifferentcommissiontoparticipateinthesyndicate?
c)Whymightdiamondproducersagreetoparticipateinthesyndicateasopposedtosellingtheiroutputontheirown?
d)Whatforcespromptdiamondproducerstoexitthesyndicate?
TheDisposableDiaperIndustryin1974(HBS9-380-175).Thiscasedescribestherapidlygrowingdisposablediaperindustryin1974,aperiodinwhichProcterandGamble’sindustryleadershipfacedstrongchallengesfromKimberlyClark,JohnsonandJohnson,andUnionCarbide.Thisillustratesoneofthemainthemesofthechapter:thatapotentialentrantmustanticipatethelikelyreactionsofincumbentfirmswhendecidingwhetherornottoenteramarket.Thiscasealsoallowsstudentstocalculatethenetpresentvalueofentryunderavarietyofpossiblepost-entryscenarios.
NucorataCrossroads(HBS9-793-039).Nucorisamini-milldecidingwhethertospendasignificantfractionofitsnetworthonacommerciallyunproventechnologyinordertopenetrateamarket.Thiscaseisanintegrativeonedesignedtofacilitateafullblownanalysisofastrategicinvestmentdecision.Thiscasecanbepreparedwithsomecombinationofthefollowingchapters:3,9,10,12,15,and16.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:
a)Howattractivedotheeconomicsofthinslabcastinglook?
b)IsthinslabcastinglikelytoaffordNucorasustainablecompetitiveadvantageinflatrolledproducts?
c)HowshouldNucorthinkabouttheuncertaintiessurroundingthinslabcasting?
SimeDarbyBerhad—1995(HBS9-797-017).SimeDarbyisoneofSouthAsia’slargestregionalconglomerates.Atthetimeofthecase,1995,itiscontemplatingentryintothefastgrowingfinancialservicessectorinMalaysiathroughacquisitionofaMalaysianbank.ThisisinkeepingwithitsactivitiesmirroringthoseoftheMalaysianeconomy.Thecasestudypresentsadiscussionofwhethertoproceedwiththeacquisition,andgetsattheunderlyingsourcesofvaluecreationoftheconglomerateintheinstitutionalcontext,whichaffectsthecostsandbenefitsofbroadcorporatescope,especiallytheevolvingcapitalmarketandthetightinterrelationshipbetweenbusinessandpolitics.Thiscasestudycanbetaughtwithsomecombinationofthefollowingchapters:2,8,14and18.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:
a)WhatarethesourcesofcompetitiveadvantageforafirmthatisaffiliatedwithSimeDarby?
b)Evaluatethequoteinthebeginningofthecase:“YouneedtocarryafairamountofweighttomakeanimpressioninAsianmarkets.”
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c)Whyisopportunisticbehavioraconcern?DoesreputationmattermoreinMalaysiathanintheU.S.(orinotheradvancedeconomies)?HowdoesSimeDarbyaddresstheseconcerns?
d)WhataresomeoftheinstitutionalvoidsfilledbySimeDarbythroughactingasanintermediaryinthefinancialmarkets?Towhatextentisbeingdiversifiedimportantforfillingtheseinstitutionalvoids?
e)ShouldSimeDarbyhaveacommonbrandnameusedinallitscompanies?
f)WhymightatalentedindividualprefertoworkatSimeDarbyratherthatatanundiversifiedcompany?
g)IsSimeDarby’srelationshipwiththegovernmentanythingbutanasset?
h)HowisSimeDarbydoingrelativetootherMalaysiancompanies?
i)ShouldSimeDarbyacquireUMBC?
SouthwestAirlines(HBS9-694-023).SouthwestAirlines,asmallintrastatecarrierservingDallas,
HoustonandSanAntonio,beginsservicein1971inthefaceofcompetitionbytwolarger,entrenchedairlines.Improvedqualityservice,lowerprices,andinnovativeadvertisingandpromotionalstrategybringSouthwesttothebrinkofprofitabilityinearly1973,whenitsmajorcompetitorhalvesfaresonSouthwest’smajorroute.Managementwonderswhatresponsetomake.Thefollowingaregoodpreparationquestions:
a)HowhasSouthwestbeenabletolowercostssomuch?
b)Howhavetheybeenabletorecruitsomanyfliers?
c)HowdidrouteselectionhelpSouthwestexecutetheabovestrategy?
EXTRAREADINGS
Thesourcesbelowprovideadditionalresourcesconcerningthetheoriesandexamplesofthechapter.
Bain,J.,BarrierstoNewCompetition:TheirCharacterandConsequencesinManufacturingIndustries,Cambridge,MA,HarvardUniversityPress,1956.
Baumol,W.,J.Panzar,andR.Willig,ContestableMarketsandtheTheoryofIndustrialStructure,NewYork,HarcourtBraceJovanovich,1982.
Dunne,T.,M.J.Robert,andL.Samuelson,“PatternsofFirmEntryandExitinU.S.Manufacturing
Industries,”RANDJournalofEconomics,Winter1988,pp.495–515.
Fisher,F.,IndustrialOrganization,EconomicsandtheLaw,Cambridge,MA,MITPress,1991.
Isaac,R.R.,andV.Smith,“InSearchofPredatoryPricing,”JournalofPoliticalEconomy,93,1985,pp.
320–345.
Milgrom,P.,andJ.Roberts,“LimitPricingandEntryunderIncompleteInformation,”Econometrica,50,1982,pp.443–460.
Smiley,R.,“EmpiricalEvidenceonStrategicEntryDeterrence,”InternationalJournalofIndustrial
Organization,6,1988,pp.167–180.
Tirole,J.,TheTheoryofIndustrialOrganization,Cambridge,MA,MITPress,1988.
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SUGGESTEDANSWERSTOEND-OF-CHAPTERQUESTIONS
1.Dunne,Roberts,andSamuelsonfoundthatindustrieswithhighentryratestendedtoalsohavehighexitrates.Canyouexplainthisfinding?Whatdoesthisimplyforpricingstrategiesofincumbentfirms?
Productionexhibitingloweconomiesofscale(aconditionthatweakensentrybarriers)andrequiringlittleornoinvestmentinspecializedassets(aconditionthatweakensexitaswellasentrybarriers)isfrequentlyobservedinindustriesexhibitinghighentryandhighexit.Considerthefollowingscenario:Firmsinanindustrywithnoentrybarrierfaceincreaseddemand.Ifthesefirmsbegintoearnpositiveprofits,entryoccurs,especiallyiftherearelittleornoexitbarriers.Asdemandturnsdown,firmsexittheindustry.Ifbarrierstoentryorexitexisted,thisindustrymightnotexhibitthispattern.
Giventhatanindustrywithnoentryorexitbarriersissusceptibleto“hitandrun”entry,wewouldexpectthefirmswithinthisindustrytopriceclosertomarginalcosttodiscouragesomeofthisactivity.
2.Dunne,Roberts,andSamuelsonexaminedmanufacturingindustriesinthe1960sto1980s.Doyouthinkthatentryandexitrateshavechangedinthepasttwodecades?Doyouthinkthatentryandexitratesaresystematicallydifferentforserviceandretailindustries?
Entryandexitratesmaybeaffectedbychangesinthestateofanindustry’stechnology.Itislikelythatevenforserviceandretailindustries,conditionsthatencourageentryinanindustryalsofosterexit.
3.“Allelseequal,anincumbentwouldpreferblockadedentrytodeterableentry.”Comment.
Entryisblockadediftheincumbentneednotundertakeanyentry-deterringstrategiestodeterentry.Blockadedentrymayresultwhentherearestructuralentrybarriers,perhapsbecauseproductionrequiressignificantfixedinvestments.Blockadedentrymayalsoresultiftheentrantexpectsunfavorablepost-entrycompetition,perhapsbecausetheentrant’sproductisundifferentiatedfromthoseoftheincumbents.
Entryisdeterrediftheincumbentcankeeptheentrantoutbyemployingentry-deterringstrategies,suchaslimitpricing,predatorypricing,andcapacityexpansion.Moreover,thecostoftheentry-deterringstrategyismorethanoffsetbytheadditionalprofitsthattheincumbentenjoysinthelesscompetitiveenvironment.However,entry-deterringstrategiesaregenerallymetwithvariousdegreesofsuccess.
Controlofessentialresources,economiesofscaleandscope,andmarketingadvantagesofincumbencyaretypesofentrybarriers.Thefirmwhoisabletouseoneoracombinationoftheseentrybarrierstoblockadeentrydoesnothavetoactivelyguarditselfagainstentryandsocanfocusonotheractivities.Ifentryisdeterredratherthanblockaded,theincumbentmustactivelyengageinpredatoryactstodiscourageentry.Athreatofentrywillmostdefinitelyconstraintheincumbent.Giventhattheincumbentmightprefertobepassiveratherthanactiveaboutdiscouragingentry,blockadedentrywouldbepreferabletodeterableentry.
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4.Underwhatconditionsdoeconomiesofscaleserveasanentrybarrier?Dothesameconditionsapplytolearningcurves?
Economiesofscalecanserveasanentrybarrierwhentheinvestmentmadebytheincumbentisasunkcost.Incumbentisunlikelytoquitwhencompetitionintensifies.Iftheinvestmentisnotasunkcost(reversibleinvestments,generalpurposeassets)thentherewillbenoentrybarriersevenifthereareeconomiesofscale.
Learningcurveeffectsaresimilartosunkcosteffects.Thehighcostofproductionduringthelearningperiodcanserveasanentrybarrier,thesamewaysunkcostinvestmentsdo.
5.“Howafirmbehavestowardexistingcompetitorsisamajordeterminantofwhetheritwillfaceentrybynewcompetitors.”Explain.
Ifafirmis“tough”towardexistingcompetitors(e.g.,thefirmisinvolvedinpriceornon-pricecompetition),thefirmwillfacelessentrybecauseentrantswillexpectlowerprofitsthaniftheincumbentweremoretolerantofentry.However,iftheincumbenthasa“soft”stancetowardtheexistingcompetitors,theentrantmaytakethisasasignalforsomeaccommodationofentryandthustheentryratecouldbehigher.Theincumbentsignalswhatpost-entrycompetitionwillbelikethroughitscurrentbehaviortowardotherfirmsintheindustry.
6.Whyisuncertaintyakeytothesuccessofentry-deterrence?
Entrydeterringstrategiesincludelimitpricing,predatorypricing,andcapacityexpansions.
?LimitPricing:Ifentrantsoperatedinaworldofcertainty,itwouldbedifficulttofindarationalexplanationforlimitpricing.Ingeneral,enteringfirmsmustbeuncertainaboutsomecharacteristicoftheincumbentfirmorthelevelofmarketdemand.Theincumbentwantstheentranttobelievethatpost-entrypriceswillbelow.Iftheentrantissureaboutthefactorsthatdeterminepost-entrypricing,itcancalculatetheincumbent’spayoffsfromallpossiblepost-entrypricingscenariosandcorrectlyforecastthepost-entryprice.Iftheentrantisuncertainaboutthepost-entryprice,however,thentheincumbent’spricingstrategycouldaffecttheentrant’sexpectations.
?PredatoryPricing:Aswithlimitpricing,predatorypricingwouldappeartobeirrationalifentrantsoperatedundercertainty.If,however,entrantslackcertainty,thenprice-cuttingbyanincumbentmayaffecttheentrant’sexpectationsoftheincumbent’sfuturepricingstrategies.Operatingunderuncertaintymakesitmoredifficultfortheentranttoruleoutabadpost-entryscenarioandthereforepredatorypricingmay,indeed,discourageentry.
?ExcessCapacity:Unlikepredatorypricingandlimitpricing,excesscapacitycandeterentryevenwhentheentrantpossessesfullinformationabouttheincumbent’scostsandstrategicdirection.Iftheincumbentisholdinganentry-deterringlevelofcapacityitisactuallyintheincumbent’sinteresttoconveythisinformationtowouldbeentrants.If,however,theincumbentisunabletoholdanentry-deterringlevelofinvestment,thentheincumbentmighthopetheentrantisuncertainaboutthelevelofcapacitytheincumbentactuallyholds.
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7.Anincumbentisconsideringexpandingitscapacity.Itcandosoinoneoftwoways.Itcanpurchasefungible,generalpurposeequipmentandmachinerythatcanberesoldatclosetoitsoriginalvalue.Oritcaninvestinhighlyspecializedmachinerythat,onceitisputinplace,hasvirtuallynosalvagevalue.Assumingthateachchoiceresultsinthesameproductioncostsonceinstalled,underwhichchoiceistheincumbentlikelytoencounteragreaterlikelihoodofentryandwhy?
Theinvestmentthatismorevisible,understandable,andirreversibleismorelikelytodeterentry.Ingeneral,asignificantinvestmentinahighlyspecializedrelationshipspecificassethasahighcommitmentvalue.Thevalueisgreaterbecausetheassethasnootheruse.Essentiallythefirmwhoseinvestmenthasnooutsideoptionhasincreaseditsownexitbarrier.Exitbarrierscanlimittheincentivesforthefirmtostopproducingevenwhentheprevailingconditionsaresuchthatthefirm,haditknownwithcertaintythattheseconditionswouldprevail,wouldnothaveenteredinthefirstplace.Giventhefirmislesslikelytoexitduringpoorindustryconditions,entryislessattractiveasindustrydownturnswillgenerateloweroverallprofitsthaniffirmscouldredeploytheirassetstootheruses.Asthequestionstates,oncetheplantisbuiltthefirmhasnooptionbuttoutilizeitwithinthisparticularindustry.Thissendsastrongsignaltothecompetitionandtheybehavelessaggressively.Henceifthefirminvestsinafungibleassetthereishigherlikelihoodthatentrywillnotbeasdeterred.
8.Inmostmodelsofentrydeterrence,theincumbentengagesinpredatorypracticesthatharmapotentialentrant.Canthesemodelsbereversed,sothattheentrantengagesinpredatorypractices?Ifsothenwhatarethepracticaldifferencesbetweenincumbentsandentrants?
Entrantsandincumbentsrolescanbeswitchedinthetheoreticalmodelsandtheresultswillholdtrue.Iftheentranthasdeeppocketsthenit
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