Entry and exit

1. Entry and exit By A.V. Vedpuriswar

4. Structural entry barriers There are three main types of structural entry barriers: Control of essential resources Economies of scale and scope Marketing advantages of incumbency An incumbent is protected from entry if it controls a resource necessary for production. Of course, such an advantage is usually difficult to protect forever. When economies of scale are significant, established firms operating at or beyond the minimum efficient scale will have a substantial cost advantage over smaller entrants. An incumbent can exploit the umbrella effect to offset uncertainty about the quality of a new product that it is introducing. The brand umbrella makes the incumbent�s sunk cost of introducing a new product less than that of a new entrant. The umbrella effect may also increase the bargaining power of the incumbent vis-a-vis distributors and retailers.

10. Judo strategy Sometimes, smaller firms and potential entrants can use the incumbent�s size to their own advantage. This is known as judo economics. If an entrant can convince the incumbent that it does not pose a significant long term threat to the incumbent�s profitability, the incumbent might think twice about incurring large losses to drive the entrant from the market. Recall the Netscape Microsoft war.

11. Exit barriers To exit a market, a firm stops production and either redeploys or sells off its assets. For a firm, exit makes sense if the value of its assets in their best alternative use exceeds the present value from remaining in the market. Exit barriers commonly arise when firms have obligations that they must meet whether or not they case operations. Relationship specific productive assets have low resale value and are hence a second exit barrier. Government restrictions can also be an exit barrier.