Entry Deterrence

Cameron Young
Entry Deterrence

● It is explained when an existing firm in a

market acts to discourage the entry of new
potential firms to the market as future
competition
Preemptive Deterrence

● Someone who is trying to strategically deter entry into the market by

attempting to reduce the entrant’s payoff if it were to enter the market
● Payoffs are dependant on the number of customers the entrant plans on
having so deterring customers is one good strategy to use
Brand Loyalty

● Brand loyalty is a great ● Consumers will be less likely

way for firms to deter to buy new entrant’s
new entrants in their products
● Consumers have no
market
experience with the new firm
● New entrants in the market
may be forced to get into
price cuts for people to
actually try their products
Examples of Entry Deterrence

1. When Monsanto signed contacts with Coke and Pepsi

● Monsanto made entry into the market less desirable because
potential entrants would have less consumers therefore less
profits since consumers are loyal to Coke and Pepsi
1. Xerox created hundreds of patents in order to make it difficult
for an entrant to challenge its plain-paper photocopying firm
● Firms are less likely to enter the photocopying market because
Xerox had so many patents and would increase the entry cost in
that market
Deterring Strategies or Strategic Barriers

● In the short run entry Examples of Deterring

deterring strategies Strategies
might lead to a firm
1. Excess capacity
operating inefficiently
2. Limit pricing
● In the long run the firm
3. Predatory pricing
will have a stronger
4. Predatory acquisition
hold over market
5. Switching cost
conditions
 Excess Capacity
● It is when an incumbent firm
threatens entrants of the
possibility to increase their
production output and establish an
excess of supply
● Reduce price to a level
competitors cannot compete
● Usually occurs in markets that
have a natural monopoly
established
1. The product service is
essential
2. The location for production
supersedes alternatives
3. The outputs are not storable
4. The product is produced at
an economies of scale
5. The product can only be
produced by a single supplier
Limit Pricing
● A pricing strategy where products are sold by a supplier at price low
enough to make it unprofitable for other firms in the market to enter
● Usually used by monopolists to discourage entry in a market
Predatory Pricing
● A pricing strategy using the method of undercutting on a large scale where a
dominant firm in an industry will deliberately reduce its prices of a product
or service to loss-making levels for short-term
● An example would be how Amazon cash from operating stayed the same for
many years to discourage new firm entrants
Predatory Acquisition

● Occur when one firm seeks to purchase a share of a

smaller target firm anonymous to the management of
the target firm
● Arise to form a new majority and establish a greater
voting power in order to effect a change
● The firm really takes over the other firm through
buying its shares on the stock market
Switching Costs

● Represents the cost a consumer faces in the light of

changing to the product or service to a competing
firms
 References

Samuelson, W. F., & Marks, S. G. (2015). Managerial Economics. (8th ed.). Hoboken, NJ: John
Wiley & Sons