Entry and Exit

Entrants threaten incumbents in two ways: First, they take market share away from incumbents. Second, entry often intensifies competition, leading to lower prices. This is a natural consequence of the Cournot and differentiated Bertrand models in which more firms imply lower prices.

Some Facts about Entry and Exit
There are three important implications for strategy:

1. When planning for the future, the managers must account for entry. 2. Managers should expect most new ventures to fail quickly. 3. Managers should know the entry and exit conditions of their industry.

Entry and Exit Decisions: Basic Concepts
The entrant must sink some capital that cannot be fully recovered upon exit – it is this element of risk that makes the entry decision difficult. The entrant hopes that postentry profits exceed the sunk entry costs. There are many potential sunk costs to enter the market such as specialized capital equipment to government licenses. The potential entrant may use many different types of information about incumbents, including pricing practices, costs and capacity to assess why postentry competition may be like.

Barriers to Entry
Structural entry barriers exists when the incumbent has natural cost of marketing advantages, or when the incumbent benefits from favorable regulations. Strategic entry barriers result when the incumbent takes aggressive actions to deter entry.

Bain’s Typology of Entry Conditions * Blockaded Entry
Entry is blockaded if structural barriers are so high that the incumbent need do nothing to deter entry. For example, production may require large fixed investments relative to the size of the market (high sunk entry costs), or the entrant may sell an undifferentiated product for which it cannot raise price above marginal cost (low postentry profitability).

* Accomodated Entry