1. Entry and Exit New firm (Bill Porter develops E*TRADE) Diversifying firm (Microsoft offers Internet Browsers)

2. Entry and Exit Dunne, Roberts, and Samuelson: Ex: 1996, 100 firms, $100 million sales By 2001, 30-40 new firms enter 30-40 old firms exit Typical entrant is @ 1/3 sales of incumbent 60% of new entrants leave by 2006 Those that stay, will double in size

3. Entry and Exit Dunne, Roberts, and Samuelson: Implications: –About 1/3 of your future competition is not competition today –Diversifying competitors with new plants are most threatening to incumbents –Most new entrants fail quickly. Those that stay; however, grow –Entry and exit conditions are correlated

4. Barriers to Entry Blockaded Entry: entry is unprofitable no matter what the incumbent does Accommodated Entry: Profit is lower for the incumbent if it acts to prevent entry Deterred Entry: Because of the incumbent’s actions, the potential entrant chooses to not enter the market

5. Structural Entry Barriers Control of Essential Resources –does not ensure monopoly profit Economies of Scale and Scope –why can’t the new firm produce mes? –Because it need advertising and sales force Marketing Advantages

6. Exit Barriers Do costs exist that must still be paid even if you leave the industry? Sunk costs

7. Entry-Deterring Strategies Investments in entry-deterrence: –Must change potential entrant’s expectations about post-entry competition –Must allow the incumbent to raise price

8. Limit Pricing Strategy: charge a price that earns an economic profit for the incumbent but is below the potential entrant’s average cost

9. Limit Pricing Problem: requires that incumbent can maintain a cost advantage Problem: requires that entrant is uncertain about the market (ex: incumbent can try to lead others to believe that costs are lower than they actually are)

10. Predatory Pricing Aimed at existing competitors Set P < AVC Raise P to monopoly price once you’ve driven out the competition

11. Predatory Pricing Problems: If firm cannot prevent entry, when is the payoff?

12. Excess Capacity This is a credible entry deterrent because it signals to other firms that price CAN fall upon entry and the incumbent still earns a profit

13. Diversification Can the diversifier benefit by coordinating the pricing of 2 products? –Yes Will the diversifier fight for supremacy? –Yes if complements –No if substitutes

14. What is used? Most used- New products: Advertising Existing products: Advertising

15. Conclusion What you really want to do is create sunk costs for your rivals if they enter. Brand loyalty (through advertising) and Pricing power (through excess capacity) appear the best strategies both in theory and in practice

16. Long-run Profitability 1) Mueller’s findings –profits converge over time –there are two classes of firms

17. Isolating Mechanisms Barriers to Imitation Early Mover Advantage

18. Barriers to Imitation Patents and copyrights Brand equity –superior access to resources –social complexity

19. Early Mover Advantage Learning Curve Network Externalities Reputation Switching costs