Context and concepts
w Context: You’re the incumbent in an industry facing
potential new entrants. How can you deter them?
ENTRY AND EXIT 2
w Concepts: entry deterrence, preemption, predation,
judo economics.
© 2001 Cabral and Backus (11/19/01)
Preemption with capacity
Example: Dupont
in the titanium
dioxide industry
in the 1970s
Normal capacity
E
[2,1]
~E
[4,0]
E
[1,-1]
~E
[3,0]
R
D
Excess capacity
R
Product proliferation
w Idea: Leave no room for new entrants in “product space”
w Example: Ready -to-eat breakfast cereals
Monopoly vs preemption strategy
x = maximum “distance” that consumers are willing to travel
y = minimum market share necessary to recover entry cost
monopoly
strategy:
minimum
number of stores
that covers
market.
Corn flakes
preemption
strategy:
minimum
number of stores
such that no
entry is
Corn flakes
profitable.
•
•
y
•
w Analysis: Linear characteristics model with one dimension
(sweetness)
Calvin
x
•
y
Chocolate-frosted
sugar bombs
•
Chocolate-frosted
sugar bombs
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Product proliferation
Other preemption strategies
w Conclusion: product proliferation may deter entry.
w Xerox plain-paper copiers: sleeping patents.
w Spatial example: Staples
w Airport landing slots: Compass II (Australia).
w Long-term contracts.
Staples was trying to build a critical mass of stores in the
Northeast to shut out competitors … By building these networks
[of stores] in the big markets like New York and Boston, we
have kept competitors out for a very, very long period.
w Nutrasweet
w RTP
w Gas Natural, SA
-- Thomas Stemberg
Predatory pricing
Why predation might work
Price low to
induce rival’s exit.
Paradox: it is
difficult to
commit to a
future price; how
can below-cost
pricing induce
exit?
Exit
H price
[0,5]
L price
[0,-2]
H price
[2,2]
L price
[-1,-1]
Pred
Prey
Stay In
The Chicago
School argument:
predatory pricing
doesn’t work for
the predator.
Pred
Judo economics
JuDo = the soft way.
A less aggressive
strategy may be
optimal in that it
avoids retaliation by
rival firm.
Soft entry
w Asymmetric information about cost
w American Tobacco
w France Telecom
w Reputation for aggression
w DeBeers
w Murdoch
w Learning curves and network effects
w Boeing in 1970s
w Capital markets: “deep pockets” can be important
w American Airlines v Northwest
w UK supermarket chains and grocery stores
Judo economics…
Retaliate
[-1,3]
Not retaliate
[1,4]
Retaliate
[-2,3]
Not retaliate
[2,2]
I
w San Miguel: small
capacity
w Southwest, Ryanair:
unusual routes,
secondary airports
E
Aggressive entry
I
2
Takeaways
w Incumbent firms have a variety of ways to discourage
entry: long-term contracts, aggressive pricing, excess
capacity, product proliferation, reputation for aggressive
response.
w Entrants can moderate the aggressive response of an
incumbent by entering on a small scale or in secondary
markets (Judo).
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