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