Entry Deterrence I
Week 4
Entry Deterrence I Structural Entry Barriers / Commitment
profits
Motivation for Entry Deterrence
Block Entry
Costs of deterring entry
Accommodate Entry t1
t2
Entry
t3
t4
“Costs” of losing market share
Raising Entry Barriers (I/II) Control of essential resources • Ensure exclusive access to resources • Secure more resources than is necessary for satisfying demand Economies of Scale / Scope • Lower costs through larger scales
• Leverage experience advantages • Increase technological lead
Raising Entry Barriers (II/II) Marketing advantages • Build brand loyalty • Raise switching costs for customers
Commitment (I/II) Commit to an aggressive behaviour after entry Eliminate those moves which would lead to equilibria that are profitable for the entrant
Commitment (II/II) Deutsche BA
Lufthansa
Deutsche BA Lufthansa
no market entry
status quo
0 1000
market entry
price war
-500 0
no price war
400 400
Commitment (II/II) Example Deutsche BA
Lufthansa
Deutsche BA Lufthansa
no market entry
status quo
0 1000
market entry
price war
-500 0
no price war
Now: Penalty of 500 to Star Alliance if no price war
400 400 - 500 = -100
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Deterrence II Limit Pricing / Predatory Pricing
Limit Pricing (I/II) Keep price low in spite of monopoly position Signal to the potential entrant • “low demand” (market may appear unattractive) • "low cost incumbent“ (dangerous competitor) Works only in presence of incomplete information
Limit Pricing (II/II) Example: Ferries and the Eurotunnel The market for channel crossing was traditionally dominated by P&O Ferries and Stena Lines Around the time rumour surfaced that the Eurotunnel might be realized, both reduced prices by up to 50%
After opening of the Eurotunnel, P&O and Stena merged and raised prices again to initial level
Dover Folkestone Calais
Predatory Pricing (I/II) Charging low prices (even below marginal costs) in the current competition • to induce exit
• and deter future entry Works only in presence of incomplete information
Predatory Pricing (II/II) Example: UK Newspaper Industry The Times
The Independent
Price
Copies
Price
Copies
1992
£ 0.45
382,000
£ 0.45
372,000
1993
£ 0.30
388,000
£ 0.50
333,000
1994
£ 0.20
550,000
£ 0.30
279,000
1995
£ 0.25
675,000
£ 0.35
296,000
1996 / 1997
£ 0.35
790,000
£ 0.40
260,000
1998
£ 0.35
770,000
£ 0.45
219,000
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Deterrence III Pre-Emption
Pre-Emption (I/II) The incumbent can pre-empt an entry by (Over-) investing to reduce variable costs of production below the level that would be optimal without threat of entry
Pursuing horizontal product differentiation with greater product variety than would be optimal without threat of entry Choosing locations of outlets more densely than would be optimal without threat of entry
Pre-Emption (II/II) Example: Coffeehouses & the London School of Economics
Pre-Emption
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Entry Deterrence I Structural Entry Barriers / Commitment
profits
Motivation for Entry Deterrence
Block Entry
Costs of deterring entry
Accommodate Entry t1
t2
Entry
t3
t4
“Costs” of losing market share
Raising Entry Barriers (I/II) Control of essential resources • Ensure exclusive access to resources • Secure more resources than is necessary for satisfying demand Economies of Scale / Scope • Lower costs through larger scales
• Leverage experience advantages • Increase technological lead
Raising Entry Barriers (II/II) Marketing advantages • Build brand loyalty • Raise switching costs for customers
Commitment (I/II) Commit to an aggressive behaviour after entry Eliminate those moves which would lead to equilibria that are profitable for the entrant
Commitment (II/II) Deutsche BA
Lufthansa
Deutsche BA Lufthansa
no market entry
status quo
0 1000
market entry
price war
-500 0
no price war
400 400
Commitment (II/II) Example Deutsche BA
Lufthansa
Deutsche BA Lufthansa
no market entry
status quo
0 1000
market entry
price war
-500 0
no price war
Now: Penalty of 500 to Star Alliance if no price war
400 400 - 500 = -100
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Deterrence II Limit Pricing / Predatory Pricing
Limit Pricing (I/II) Keep price low in spite of monopoly position Signal to the potential entrant • “low demand” (market may appear unattractive) • "low cost incumbent“ (dangerous competitor) Works only in presence of incomplete information
Limit Pricing (II/II) Example: Ferries and the Eurotunnel The market for channel crossing was traditionally dominated by P&O Ferries and Stena Lines Around the time rumour surfaced that the Eurotunnel might be realized, both reduced prices by up to 50%
After opening of the Eurotunnel, P&O and Stena merged and raised prices again to initial level
Dover Folkestone Calais
Predatory Pricing (I/II) Charging low prices (even below marginal costs) in the current competition • to induce exit
• and deter future entry Works only in presence of incomplete information
Predatory Pricing (II/II) Example: UK Newspaper Industry The Times
The Independent
Price
Copies
Price
Copies
1992
£ 0.45
382,000
£ 0.45
372,000
1993
£ 0.30
388,000
£ 0.50
333,000
1994
£ 0.20
550,000
£ 0.30
279,000
1995
£ 0.25
675,000
£ 0.35
296,000
1996 / 1997
£ 0.35
790,000
£ 0.40
260,000
1998
£ 0.35
770,000
£ 0.45
219,000
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Deterrence III Pre-Emption
Pre-Emption (I/II) The incumbent can pre-empt an entry by (Over-) investing to reduce variable costs of production below the level that would be optimal without threat of entry
Pursuing horizontal product differentiation with greater product variety than would be optimal without threat of entry Choosing locations of outlets more densely than would be optimal without threat of entry
Pre-Emption (II/II) Example: Coffeehouses & the London School of Economics
Pre-Emption
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
