Lecture: Entry strategies

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
 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
 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):
 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.
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