戰(zhàn)略經(jīng)濟(jì)學(xué)206790課件ch-2

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CHAPTER11:EntryandExit

CHAPTEROUTLINE

1)Introduction

2)SomeFactsAboutEntryandExit

3)EntryandExitDecisions:BasicConcepts

?BarrierstoEntry

?Bain’sTypologyofEntryConditions

?AnalyzingEntryConditions:TheAsymmetryRequirementExample11.1:Hyundai’sEntryintotheSteelIndustry

?StructuralEntryBarriers

Example11.2:EmiratesAir

?BarrierstoExit

4)Entry-DeterringStrategies

?LimitPricing

Example11.3:LimitPricingbyBrazilianCementManufacturers

?IsStrategicLimitPricingRational?

Example11.4:EntryBarriersandProfitabilityintheJapaneseBrewingIndustry?PredatoryPricing

?TheChain-StoreParadox

?RescuingLimitPricingandPredation:TheImportanceofUncertaintyandReputationExample11.5:PredatoryPricingintheLaboratory

?CapacityExpansion

?“JudoEconomics”andthe“Puppy-DogPloy”

5)Exit-PromotingStrategies

?WarsofAttrition

Example11.6:Wal-MartEntersGermany…andExits

6)EvidenceonEntry-DeterringBehavior

?AnEntry-DeterrenceChecklist

?SurveyDataonEntryDeterrence

7)ChapterSummary

8)Questions

9)Endnotes

CHAPTERSUMMARY

Thefocusofthischapterisonthedynamicsofentryandexitinthemarketplace.Ingeneral,entrantsintoanindustryreducethemarketshareoffirmsintheindustryandintensifycompetitionthroughproductintroductionandpricecompetition.This,inturn,reducesprofitsforallcompetingfirmsintheindustry.

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Likewise,whenafirmexitsanindustry,marketshareforremainingfirmsisincreased,priceandproductcompetitionisreduced,andprofitsincrease.

Afirmwillenteramarketifthenetpresentvalueofexpectedpost-entryprofitsexceedsthesunkcostsofentry.Afirmwouldexitamarketiftheexpectedfuturelossesexceedthesunkcostsofexit.Factorsthatreducethelikelihoodofentry/exitarecalledentry/exitbarriers.

Thestructuralentrybarriersresultfromexogenousmarketforces.Thesearethebarriersthatcannotbeinfluencedbyincumbentsfirms.Low-demand,high-capitalrequirementsandlimitedaccesstoresourcesareallexamplesofstructuralentrybarriers.Exitbarriersarisewhenfirmshaveobligationsthattheymustkeepwhethertheyproduceornot.Examplesofsuchobligationsincludelaboragreementsandcommitmentstopurchaserawmaterials,obligationstoinputsuppliersandrelationship-specificinvestments.

Thechaptercontainsadiscussionofthestrategiesthatincumbentsusetodeterentryorhastenexitbycompetitors.Limitpricing,predatorypricing,andcapacityexpansionchangeentrants’forecastsoftheprofitabilityofpost-entrycompetitionandthusreducethethreatofentryand/orpromoteexit.

Limitpricingreferstothepracticewherebyanincumbentfirmcandiscourageentrybyitsabilitytosustainalowpriceuponfacingentry,whilesettingahigherpricewhenentryisnotimminent.Predatorypricingisthepracticeofsettingapricewiththeobjectiveofdrivingnewentrantsorincumbentfirmsoutoftheindustry.Limitpricingandpredatorypricingstrategiescansucceedonlyiftheentrantisuncertainaboutthenatureofpost-entrycompetition.

Firmsmayalsochoosetoholdexcesscapacitythatservesasacrediblecommitmentthattheincumbentwillexpandoutputshouldentryoccur.

Thenextsectionprovidesadiscussionofexit-promotingstrategies.Inparticular,thesectioncontainsanexampleofhowStandardOilin1870dominatedtherefiningindustrythroughpredatorypricing.StandardOil,Toyota,andWal-Marthaveallbeenaccusedofslashingpricesbelowcosttoeliminatecompetition.Pricewarsareexamplesofwarsofattrition,wherelargerfirmsengageinpricewars,harmfultotheindustryprofits,todriveoutcompetition.Suchtacticsareusedbyfirmsthatbelievethattheycanoutlasttheirrivals.

Diversificationcanhelporhurtentrywhenproductsarerelatedthrougheconomiesofscope.Diversifiedfirmsmayenjoyeconomiesofscopeinproduction,distribution,andmarketing.Entrycostsofdiversifiedfirmstendtobelowerthanstartupfirmssincetheyarelargerandhaveaccesstolowercostcapital.Adiversifiedfirmcanbettercoordinatepricingacrossrelatedproducts,butmaybevulnerableifpricewarinonemarketcutsintoitsprofitsinasubstituteproductmarket.

Thelastsectionofthischapterdiscussessurveyofproductmanagersabouttheiruseofentrydeterringstrategies.Productmanagersreportedthattheyrelymuchmoreonentry-deterringstrategies(aggressivepricereduction,intenseadvertisingtocreatebrandloyalty,andacquiringpatents)thanstrategiesthataffecttheentrant’sperception(enhancingfirmsreputationthroughannouncements,limitpricing,and

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holdingexcesscapacity).Managersalsoreportedthattheyaremorelikelytopursueentry-deterringstrategiesfornewproductsthanforexistingproducts.

APPROACHESTOTEACHINGTHISCHAPTER

ParticularAttentionMustBePaidToTheFollowingConcepts:

?Entryreducesshare,increasescompetition,andreducesprofits.Exithastheinverseeffects.

?Barrierstoentryareamajorfactorinevaluatingentryconditionsintoamarket.Thecasestudiesandexamplesinthetexthelpthestudentidentifythedifferenttypesofbarriers.Itisimportantthestudentbeabletonotonlyunderstandthebarrierstoentryintheexamplesbuttoalsobeabletoapplythisknowledgetootherindustries.

?Post-entrycompetitionishowentrantsassesstheirwillingnesstoenteramarket.Thusincumbentfirmsmayuseentrance-deterringstrategiestoavertentrancebynewfirms.

?Studentsmustunderstandtheassumptionsunderwhichlimitpricingwillandwillnotwork.

Assumingthatafirmconsideringenteringamarkethasperfectmarketinformation,limitpricingwouldneverworkforanincumbentfirm.Itisonlywhentheentrantisunsureaboutthelevelofpost-entrypricesthatlimitpricingmaywork.

?Inorderforafirmtomakeasuccessfulentranceintoamarketitmustbeabletorecognizeawidehostofbarrierstoentryandanticipatethemanyscenariosofpost-entrybehaviorbytheentrant’scompetitors.

DEFINITIONS

AccommodatedEntry:Existsifstructuralentrybarriersarelowandeither(1)entry-deterringstrategieswouldbeineffective;or(2)thecosttoincumbentsoftryingtodeterentryexceedsthepotentialbenefitsfromkeepingentrantsout.

BlockadedEntry:Existsifincumbentsneednotundertakeanyentry-deterringstrategiestodeterentry.Blockadedentrymayresultwhentherearestructuralentrybarriers,orifentrantsexpectunfavorablepost-entrycompetition,perhapsbecausetheentrants’productionisundifferentiatedfromthatoftheincumbents.

DeterredEntry:Existswhenincumbentscankeepentrantsoutusingentry-deterringstrategies.

Entry:Occursasnewfirmsbeginproductionandsalesinamarket.Entrycanoccurundertwodifferentsituations:(a)bynewfirms,thatwerepreviouslynotintheindustry,or(b)diversifyingfirms,whicharefirmsthatwereinbusiness,butwerenotpreviouslydoingbusinessinthatmarket.

Exit:Occurswhenafirmceasestoproduceinamarket.Exitfromanindustryoccurswhenafirmceasestooperatecompletelyorcontinuestooperateinothermarketsbutwithdrawsitsproductofferingsfromtheindustryunderconsideration.Toexitanindustry,afirmstopsproductionandeitherredeploysorsellsoffitsassets.

Incumbent:Firmthatisalreadyinoperationinamarket.

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LimitPricing:Referstothepracticewherebyanincumbentfirmcandiscourageentrybychargingalowpricebeforeentryoccurs.Theentrant,observingthelowpricesetbytheincumbent,infersthatpost-entrypricewouldbeasloworevenlower,andthatentryintothemarketwouldthereforebeunprofitable.

PerfectlyContestable:Describestheconditionwhenamonopolistcannotraisepricesabovecompetitivelevels.Intheory,thethreatofentrycanconstrainamonopolistfromraisingprices.

Post-entryCompetition:Theconductandperformanceoffirmsafterentryhasoccurred.

PredatoryActs:Entrydeterringstrategiesbyanincumbentthatappeartoreduceitsprofits,untiloneaccountsfortheadditionalprofitsthatitearnsbecausetheactsdeterentryorpromoteexitbycompetitors.

PredatoryPricing:Referstothepracticeofsettingpricewiththeobjectiveofdrivingnewentrantsor

existingfirmsoutofbusiness.

StrategicEntryBarriers:Existswhenincumbentfirmstakeexplicitactionsaimedatdeterringentry.Entry-deterringstrategiesincludecapacityexpansion,limitpricing,andpredatorypricing.

StructuralEntryBarriers:Resultwhenincumbentshavenaturalcostormarketingadvantages,orbenefitsfromfavorableregulations.Lowdemand,high-capitalrequirementsandlimitedaccesstoresourcesareallexamplesofstructuralentrybarriers.

SUGGESTEDHARVARDCASESTUDIES1

Caterpillar(HBS9-385-276).Thiscasedescribesthestructureandevolutionoftheearthmovingequipmentindustryworldwideinthepostwarera,particularlyfocusingondevelopmentsinthe1980sand1970s.DescribesCaterpillar’sstrategyinbecomingthedominantworldwidecompetitorwithindustrymarketshareexceeding50%.IncludesdetailsonCAT’smanufacturing,marketingresearchanddevelopment,andorganizationalpolicies.Concludeswithadescriptionofsomeenvironmentalchangesoccurringintheearly1980’s,andraisesthequestionofhowthesemightaffectCaterpillarTractorCo.’srecord1981performanceandrequirechangesinitshighlysuccessfulstrategy.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:

a)DescribethekeydriverstoCaterpillar’shistoricalsuccess.

b)DescribechangesinthecompetitiveenvironmentandexplainhowthesechangesmightimpactCAT.

DeBeersConsolidatedMines(HBS9-391-076).ThiscasedescribestheproblemsfacingDeBeersatthestartof1983.DeBeershad,sinceitsformationin1888,exercisedalargemeasureofcontrolovertheworldsupplyofdiamonds.In1983,thecompanyitselfminedover40%oftheworld’snaturaldiamondsand,throughmarketingarrangementswithotherproducers,distributedover70%.For50yearsupto1983thecompanyneverlowereditspricesand,overall,hadraisedthemsignificantlyaheadoftherateofinflation.However,in1983thecompanywasfacedwithaseriesofproblemsthatthreatenedthestructureithadsocarefullybuilt.FirstalargeproducingnationhadstoppedsellingthroughDeBeers.Second,newdiscoveriesmeantthattheannualsupplyofmineddiamondswoulddoubleby1986.Finally,theindustrywasexperiencingitsworstslumpsincethe1930s,resultinginasignificantdeteriorationin

1ThesedescriptionshavebeenadaptedfromHarvardBusinessSchoolCatalogofTeachingMaterials.

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thecompany’sfinancialposition.ItalsodescribesthestructureandeconomicsofthediamondindustryandasksthestudenttodecidewhetherornotDeBeersshouldabandonthebusinessstrategyithadpursuedfornearlyacentury.Thiscasecanbetaughtwithsomecombinationofthefollowingchapters:2,8,13,14and16.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:

a)Whatarethecharacteristicsofroughdiamondsthatcreatechallengesinsustainingamonopolyofthistrade?

b)WhydoesDeBeersrequiredifferentcountriestopaydifferentcommissiontoparticipateinthesyndicate?

c)Whymightdiamondproducersagreetoparticipateinthesyndicateasopposedtosellingtheiroutputontheirown?

d)Whatforcespromptdiamondproducerstoexitthesyndicate?

TheDisposableDiaperIndustryin1974(HBS9-380-175).Thiscasedescribestherapidlygrowingdisposablediaperindustryin1974,aperiodinwhichProcterandGamble’sindustryleadershipfacedstrongchallengesfromKimberlyClark,JohnsonandJohnson,andUnionCarbide.Thisillustratesoneofthemainthemesofthechapter:thatapotentialentrantmustanticipatethelikelyreactionsofincumbentfirmswhendecidingwhetherornottoenteramarket.Thiscasealsoallowsstudentstocalculatethenetpresentvalueofentryunderavarietyofpossiblepost-entryscenarios.

NucorataCrossroads(HBS9-793-039).Nucorisamini-milldecidingwhethertospendasignificantfractionofitsnetworthonacommerciallyunproventechnologyinordertopenetrateamarket.Thiscaseisanintegrativeonedesignedtofacilitateafullblownanalysisofastrategicinvestmentdecision.Thiscasecanbepreparedwithsomecombinationofthefollowingchapters:3,9,10,12,15,and16.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:

a)Howattractivedotheeconomicsofthinslabcastinglook?

b)IsthinslabcastinglikelytoaffordNucorasustainablecompetitiveadvantageinflatrolledproducts?

c)HowshouldNucorthinkabouttheuncertaintiessurroundingthinslabcasting?

SimeDarbyBerhad—1995(HBS9-797-017).SimeDarbyisoneofSouthAsia’slargestregionalconglomerates.Atthetimeofthecase,1995,itiscontemplatingentryintothefastgrowingfinancialservicessectorinMalaysiathroughacquisitionofaMalaysianbank.ThisisinkeepingwithitsactivitiesmirroringthoseoftheMalaysianeconomy.Thecasestudypresentsadiscussionofwhethertoproceedwiththeacquisition,andgetsattheunderlyingsourcesofvaluecreationoftheconglomerateintheinstitutionalcontext,whichaffectsthecostsandbenefitsofbroadcorporatescope,especiallytheevolvingcapitalmarketandthetightinterrelationshipbetweenbusinessandpolitics.Thiscasestudycanbetaughtwithsomecombinationofthefollowingchapters:2,8,14and18.Youmaywanttoaskstudentstothinkofthefollowingquestionsinpreparationforthecase:

a)WhatarethesourcesofcompetitiveadvantageforafirmthatisaffiliatedwithSimeDarby?

b)Evaluatethequoteinthebeginningofthecase:“YouneedtocarryafairamountofweighttomakeanimpressioninAsianmarkets.”

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c)Whyisopportunisticbehavioraconcern?DoesreputationmattermoreinMalaysiathanintheU.S.(orinotheradvancedeconomies)?HowdoesSimeDarbyaddresstheseconcerns?

d)WhataresomeoftheinstitutionalvoidsfilledbySimeDarbythroughactingasanintermediaryinthefinancialmarkets?Towhatextentisbeingdiversifiedimportantforfillingtheseinstitutionalvoids?

e)ShouldSimeDarbyhaveacommonbrandnameusedinallitscompanies?

f)WhymightatalentedindividualprefertoworkatSimeDarbyratherthatatanundiversifiedcompany?

g)IsSimeDarby’srelationshipwiththegovernmentanythingbutanasset?

h)HowisSimeDarbydoingrelativetootherMalaysiancompanies?

i)ShouldSimeDarbyacquireUMBC?

SouthwestAirlines(HBS9-694-023).SouthwestAirlines,asmallintrastatecarrierservingDallas,

HoustonandSanAntonio,beginsservicein1971inthefaceofcompetitionbytwolarger,entrenchedairlines.Improvedqualityservice,lowerprices,andinnovativeadvertisingandpromotionalstrategybringSouthwesttothebrinkofprofitabilityinearly1973,whenitsmajorcompetitorhalvesfaresonSouthwest’smajorroute.Managementwonderswhatresponsetomake.Thefollowingaregoodpreparationquestions:

a)HowhasSouthwestbeenabletolowercostssomuch?

b)Howhavetheybeenabletorecruitsomanyfliers?

c)HowdidrouteselectionhelpSouthwestexecutetheabovestrategy?

EXTRAREADINGS

Thesourcesbelowprovideadditionalresourcesconcerningthetheoriesandexamplesofthechapter.

Bain,J.,BarrierstoNewCompetition:TheirCharacterandConsequencesinManufacturingIndustries,Cambridge,MA,HarvardUniversityPress,1956.

Baumol,W.,J.Panzar,andR.Willig,ContestableMarketsandtheTheoryofIndustrialStructure,NewYork,HarcourtBraceJovanovich,1982.

Dunne,T.,M.J.Robert,andL.Samuelson,“PatternsofFirmEntryandExitinU.S.Manufacturing

Industries,”RANDJournalofEconomics,Winter1988,pp.495–515.

Fisher,F.,IndustrialOrganization,EconomicsandtheLaw,Cambridge,MA,MITPress,1991.

Isaac,R.R.,andV.Smith,“InSearchofPredatoryPricing,”JournalofPoliticalEconomy,93,1985,pp.

320–345.

Milgrom,P.,andJ.Roberts,“LimitPricingandEntryunderIncompleteInformation,”Econometrica,50,1982,pp.443–460.

Smiley,R.,“EmpiricalEvidenceonStrategicEntryDeterrence,”InternationalJournalofIndustrial

Organization,6,1988,pp.167–180.

Tirole,J.,TheTheoryofIndustrialOrganization,Cambridge,MA,MITPress,1988.

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SUGGESTEDANSWERSTOEND-OF-CHAPTERQUESTIONS

1.Dunne,Roberts,andSamuelsonfoundthatindustrieswithhighentryratestendedtoalsohavehighexitrates.Canyouexplainthisfinding?Whatdoesthisimplyforpricingstrategiesofincumbentfirms?

Productionexhibitingloweconomiesofscale(aconditionthatweakensentrybarriers)andrequiringlittleornoinvestmentinspecializedassets(aconditionthatweakensexitaswellasentrybarriers)isfrequentlyobservedinindustriesexhibitinghighentryandhighexit.Considerthefollowingscenario:Firmsinanindustrywithnoentrybarrierfaceincreaseddemand.Ifthesefirmsbegintoearnpositiveprofits,entryoccurs,especiallyiftherearelittleornoexitbarriers.Asdemandturnsdown,firmsexittheindustry.Ifbarrierstoentryorexitexisted,thisindustrymightnotexhibitthispattern.

Giventhatanindustrywithnoentryorexitbarriersissusceptibleto“hitandrun”entry,wewouldexpectthefirmswithinthisindustrytopriceclosertomarginalcosttodiscouragesomeofthisactivity.

2.Dunne,Roberts,andSamuelsonexaminedmanufacturingindustriesinthe1960sto1980s.Doyouthinkthatentryandexitrateshavechangedinthepasttwodecades?Doyouthinkthatentryandexitratesaresystematicallydifferentforserviceandretailindustries?

Entryandexitratesmaybeaffectedbychangesinthestateofanindustry’stechnology.Itislikelythatevenforserviceandretailindustries,conditionsthatencourageentryinanindustryalsofosterexit.

3.“Allelseequal,anincumbentwouldpreferblockadedentrytodeterableentry.”Comment.

Entryisblockadediftheincumbentneednotundertakeanyentry-deterringstrategiestodeterentry.Blockadedentrymayresultwhentherearestructuralentrybarriers,perhapsbecauseproductionrequiressignificantfixedinvestments.Blockadedentrymayalsoresultiftheentrantexpectsunfavorablepost-entrycompetition,perhapsbecausetheentrant’sproductisundifferentiatedfromthoseoftheincumbents.

Entryisdeterrediftheincumbentcankeeptheentrantoutbyemployingentry-deterringstrategies,suchaslimitpricing,predatorypricing,andcapacityexpansion.Moreover,thecostoftheentry-deterringstrategyismorethanoffsetbytheadditionalprofitsthattheincumbentenjoysinthelesscompetitiveenvironment.However,entry-deterringstrategiesaregenerallymetwithvariousdegreesofsuccess.

Controlofessentialresources,economiesofscaleandscope,andmarketingadvantagesofincumbencyaretypesofentrybarriers.Thefirmwhoisabletouseoneoracombinationoftheseentrybarrierstoblockadeentrydoesnothavetoactivelyguarditselfagainstentryandsocanfocusonotheractivities.Ifentryisdeterredratherthanblockaded,theincumbentmustactivelyengageinpredatoryactstodiscourageentry.Athreatofentrywillmostdefinitelyconstraintheincumbent.Giventhattheincumbentmightprefertobepassiveratherthanactiveaboutdiscouragingentry,blockadedentrywouldbepreferabletodeterableentry.

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4.Underwhatconditionsdoeconomiesofscaleserveasanentrybarrier?Dothesameconditionsapplytolearningcurves?

Economiesofscalecanserveasanentrybarrierwhentheinvestmentmadebytheincumbentisasunkcost.Incumbentisunlikelytoquitwhencompetitionintensifies.Iftheinvestmentisnotasunkcost(reversibleinvestments,generalpurposeassets)thentherewillbenoentrybarriersevenifthereareeconomiesofscale.

Learningcurveeffectsaresimilartosunkcosteffects.Thehighcostofproductionduringthelearningperiodcanserveasanentrybarrier,thesamewaysunkcostinvestmentsdo.

5.“Howafirmbehavestowardexistingcompetitorsisamajordeterminantofwhetheritwillfaceentrybynewcompetitors.”Explain.

Ifafirmis“tough”towardexistingcompetitors(e.g.,thefirmisinvolvedinpriceornon-pricecompetition),thefirmwillfacelessentrybecauseentrantswillexpectlowerprofitsthaniftheincumbentweremoretolerantofentry.However,iftheincumbenthasa“soft”stancetowardtheexistingcompetitors,theentrantmaytakethisasasignalforsomeaccommodationofentryandthustheentryratecouldbehigher.Theincumbentsignalswhatpost-entrycompetitionwillbelikethroughitscurrentbehaviortowardotherfirmsintheindustry.

6.Whyisuncertaintyakeytothesuccessofentry-deterrence?

Entrydeterringstrategiesincludelimitpricing,predatorypricing,andcapacityexpansions.

?LimitPricing:Ifentrantsoperatedinaworldofcertainty,itwouldbedifficulttofindarationalexplanationforlimitpricing.Ingeneral,enteringfirmsmustbeuncertainaboutsomecharacteristicoftheincumbentfirmorthelevelofmarketdemand.Theincumbentwantstheentranttobelievethatpost-entrypriceswillbelow.Iftheentrantissureaboutthefactorsthatdeterminepost-entrypricing,itcancalculatetheincumbent’spayoffsfromallpossiblepost-entrypricingscenariosandcorrectlyforecastthepost-entryprice.Iftheentrantisuncertainaboutthepost-entryprice,however,thentheincumbent’spricingstrategycouldaffecttheentrant’sexpectations.

?PredatoryPricing:Aswithlimitpricing,predatorypricingwouldappeartobeirrationalifentrantsoperatedundercertainty.If,however,entrantslackcertainty,thenprice-cuttingbyanincumbentmayaffecttheentrant’sexpectationsoftheincumbent’sfuturepricingstrategies.Operatingunderuncertaintymakesitmoredifficultfortheentranttoruleoutabadpost-entryscenarioandthereforepredatorypricingmay,indeed,discourageentry.

?ExcessCapacity:Unlikepredatorypricingandlimitpricing,excesscapacitycandeterentryevenwhentheentrantpossessesfullinformationabouttheincumbent’scostsandstrategicdirection.Iftheincumbentisholdinganentry-deterringlevelofcapacityitisactuallyintheincumbent’sinteresttoconveythisinformationtowouldbeentrants.If,however,theincumbentisunabletoholdanentry-deterringlevelofinvestment,thentheincumbentmighthopetheentrantisuncertainaboutthelevelofcapacitytheincumbentactuallyholds.

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7.Anincumbentisconsideringexpandingitscapacity.Itcandosoinoneoftwoways.Itcanpurchasefungible,generalpurposeequipmentandmachinerythatcanberesoldatclosetoitsoriginalvalue.Oritcaninvestinhighlyspecializedmachinerythat,onceitisputinplace,hasvirtuallynosalvagevalue.Assumingthateachchoiceresultsinthesameproductioncostsonceinstalled,underwhichchoiceistheincumbentlikelytoencounteragreaterlikelihoodofentryandwhy?

Theinvestmentthatismorevisible,understandable,andirreversibleismorelikelytodeterentry.Ingeneral,asignificantinvestmentinahighlyspecializedrelationshipspecificassethasahighcommitmentvalue.Thevalueisgreaterbecausetheassethasnootheruse.Essentiallythefirmwhoseinvestmenthasnooutsideoptionhasincreaseditsownexitbarrier.Exitbarrierscanlimittheincentivesforthefirmtostopproducingevenwhentheprevailingconditionsaresuchthatthefirm,haditknownwithcertaintythattheseconditionswouldprevail,wouldnothaveenteredinthefirstplace.Giventhefirmislesslikelytoexitduringpoorindustryconditions,entryislessattractiveasindustrydownturnswillgenerateloweroverallprofitsthaniffirmscouldredeploytheirassetstootheruses.Asthequestionstates,oncetheplantisbuiltthefirmhasnooptionbuttoutilizeitwithinthisparticularindustry.Thissendsastrongsignaltothecompetitionandtheybehavelessaggressively.Henceifthefirminvestsinafungibleassetthereishigherlikelihoodthatentrywillnotbeasdeterred.

8.Inmostmodelsofentrydeterrence,theincumbentengagesinpredatorypracticesthatharmapotentialentrant.Canthesemodelsbereversed,sothattheentrantengagesinpredatorypractices?Ifsothenwhatarethepracticaldifferencesbetweenincumbentsandentrants?

Entrantsandincumbentsrolescanbeswitchedinthetheoreticalmodelsandtheresultswillholdtrue.Iftheentranthasdeeppocketsthenit