Today’s class
5. Strategic commitments
5.1 Sequential games and the logic of commitment
5.2 Strategic commitment and competition
5.3 Entry deterrence
5.4 Entry strategies
Entry from the perspective of the
entrant:
 The paradox of entry barriers:
– A high barrier means you can’t get in.
– A low barrier means profits are low. Why enter then?
 Solution: entry is attractive if entrant can scale entry
barriers more cheaply than others.
Entry Strategies
 Most entrants are small
 Aim: make aggressive reaction by incumbents less
likely
 Increase expected cost of driving entrant out
– Signal determination to stay in
– Signal willingness to fight
 Decrease expected benefit of driving entrant out
– Stay small and/or differentiate
Judo Economics = Use rival’s strength
and inflexibility to your advantage
 More specifically, stay small or differentiate to discourage
incumbent from going after you
 Logic:
– If you enter with low price and try to get large share of market, strong
incumbent will fight back => you lose
– Suppose you enter with small capacity instead.
 If the incumbent matches, gets lower margin on all customers
 Incumbent may be better off leaving small share of market to you!
– Related: United vs. TWA’s response to AA’s Value Pricing
 Works even if entrant has neither cost nor benefit advantage
Example: Fox’s entry in TV network
market in 1986
 Began with only two hours of late-night programming
(instead of prime-time): signal intention to stay small
 Targeted a young urban audience (instead of family):
differentiate
 The role of Murdoch’s reputation as empire-builder:
signal determination to stay in, rationally or not
 Public statements about NewsCorp’s cash reserves &
Fox’s willingness to take losses: signal determination to
fight if necessary
 Moves that reduced networks’ incentive to fight Fox
Other examples
 Minnetonka’s introduction of Softsoap in 1980
– P&G etc. were reluctant to enter brands in detergent category
 Integration of U.K. supermarkets into retail gasoline in
early 1990s (a failed attempt at Judo…)
– Low prices to lure customers to supermarkets
– Perhaps hoped that Shell etc. would not respond, but they did.
Caveats
1. There needs to be reason why targeted matching by
incumbent is not possible
– E.g. “rule” about same price for all customers
– Value-based connection between market segments, e.g. risk
of jeopardizing main brand
2. Entrant needs to convince incumbent of intention to
stay small
– Was Value Pricing triggered by entry of Braniff Airlines in
Dallas (see BDSS)?
3. Judo strategies often buy valuable time, but do not
directly create sustainable competitive advantage