Management and Markets

1
Management and Markets

• Product Differentiation and Competition

2
Typology of Entry Conditions

• Structural Barriers to Entry
• Incumbent doesnt need to do anything to deter
  entry
• E.g., huge production economies relative to
  demand (airframe industry)
• Strategic Barriers to Entry
• Incumbent can keep entrant out via actions
• First mover capacity, location, price,
  standards, etc.
• Accommodated entry
• Cost of strategic deterrence lt profits from
  deterrence
• Low entry barriers
• Entry deterring strategies ineffective or too
  costly

3
Entry and Entry-Deterring Strategies

• Entry Deterrence
• Product proliferation (Schmalensee)
• Limit Pricing (Milgrom and Roberts)
• Capacity (e.g., Fudenberg and Tirole)
• Other first moves (described in Montgomery and
  Lieberman)
• Entrant Strategies
• Judo strategy -e.g., commitment to be small
  (Gelman and Salop)
• Attacking multiproduct incumbent (Judd)

4
Spatial Model of Product Differentiation

• Buyers have differentiated preferences based on
  location and price
• Sellers choose location and price (often
  sequentially)
• Sellers engage in localized competition
• Assumptions re
• Economies of scale (e.g. minimum
  advertising/launch costs)
• Localized rivalry
• Mobility of incumbents (e.g. fixed location, exit
  costs high)
• Order of moves

5
Product Proliferation as Deterrence

• Establish fact
• Proliferation occurs Incumbent providing more
  products than it would if there were no threat of
  entry
• Proliferation deters The current number of
  products deters entry
• Establish Motive
• Counterfactual Number of products that would be
  made in the absence of threat of entry would not
  deter entry
• Profitable Deterring entry is more profitable
  for the incumbent than accommodating entry

6
Spatial Preemption and Commitment

• Product proliferation may be strategic preemption
• Channel preemption
• Spatial/positioning preemption
• Form of customer preemption without lock-in
• Effective preemption requires commitment
• If incumbent can commit to products (i.e. commit
  to not withdraw and not to move), entry is
  preempted
• If incumbent not committed
• If entrant costs sunk (committed), incumbent
  withdraws or moves
• If entrant costs not sunk (not committed),
  entrant may withdraw
• Each party benefits from commitment
• Commitment sacrifices flexibility
• Commitment involves cost