Entry and Exit (lect 9 part 3): Strategic barriers to entry (incumbent take actions to deter entry)
A Coggle Diagram about Can limit pricing and predatory pricing be effective? Yes:, Limit pricing (However:
– Limit pricing may lead to sacrifice of profits or inability to meet
market demand., So? Smart?
– Depends, when multiple periods are considered the incumbent may be better of being a duopolist than limit pricing forever as monopolist. and The incumbent sets the price sufficiently low to discourage entrants.
-->If entrant infers that post-entry price will be low, entry may not be likely.), Predatory pricing (– Setting the price below short-run marginal cost expecting to recoup
the losses via monopoly profits once the rival exits., So? Smart?
– Depends on the information of the entrant.
– And of, for example, the risk for a ‘war of attrition’. and However Chain-Store Paradox:
– If all entrants can perfectly foresee the future course of incumbent’s
pricing, predatory pricing will not work.), Strategic bundling (So? Smart? Works to deter entry if:, However:
– Potentially anticompetitive, violating antitrust laws. and When a combination of goods or services is sold at a price that is less
than the price of the same items separately.), Expanding capacity (So? Smart? Works to deter entry if: and – By holding excess capacity the incumbent can credibly threaten to
lower the price if entry occurs.), for these strategies to work and Importance of barriers to entry and the differences in these barriers per industry and country.
Or: In order for a firm to make successful entrance into a market it must be able to recognise barriers to entry and anticipate many scenario’s of post-entry behaviour by the entrant’s competitors.