Judo and the Art of Entry

1
Judo and the Art of Entry
2
Assumptions

• Rational economic behavior
• No product differentiation
• Customer loyalty if prices are equal

3
12

Q
12
4
12

7
Profit 25
CE 3
CI 2
TC 10
Q
5
12
5
12

7
Profit 25
PE 4
CE 3
CI 2
TC 10
Q
5
12
6
12
Entrant limits scale to one.

7
Profit 25
PE 4
CE 3
CI 2
TC 10
Q
5
1
12
7
Suppose Entrant gives away coupon at
random? Coupon holder has right to buy one unit
for 4.00. If coupon is transferable, who is
final buyer?
Suppose Entrant sells coupon? What will be the
price? Who will buy it?
Should incumbent honor the coupon?
8
Real World Examples

• Kiwi Airlines entering business in 1992
• MCI ATT (1970s)
• Liberty Cable Time Warner Cable in New York
  (1991)

9
Real World Example
Eastern Airlines in 1980 was competing with New
York Air for East Coast shuttle routes Eastern
was also competing with American and United on
transcontinental routes. On its shuttle routes,
Eastern offered coupons for discounts on its
transcontinental routes. American and United
immediately honored these coupons, allowing
Eastern to cut back on its transcontinental
routes in favor of shuttle routes
10
THE
END
THE
END