barriers to entry - strategic deterrence
Strategic entry deterrence involves any move by existing firms to reinforce their position against other firms or potential rivals.
This might involve:
Product differentiation through brand proliferation (i.e. investment in developing new products and heavy spending on marketing and advertising)
Capacity expansion to achieve lower unit costs, and also
Predatory pricing. Incumbent businesses may offer price cuts to customers who identify lower price entrants.
Strategic barriers may be deemed anti-competitive by the British and European Union competition authorities - The European Competition Commissioner Mario Monti has been active in the last couple of years in building cases against European businesses that have engaged in anti-competitive practices including price fixing cartels.
Nonetheless we often do witness the entry of new suppliers into markets and industries where one or more firms have a clear position of market power.
Entry can occur in a variety of ways:
• A takeover from outside the industry (sometimes known as the “trojan horse route” to by-pass any structural entry barriers that might exist within an industry)
• The widening of a product range from a firm outside a specific market but with a state of technology sufficient to challenge existing firms
• A transfer of brand names from one sector of the economy to another (for example the diversification practiced by both EasyGroup and Virgin in recent years)
• Increasing competition from overseas - perhaps stimulated by fluctuations in the exchange rate of the development of a competitive advantage by foreign businesses
• Growing markets – if demand is increasing, market prices might be expected to rise and through the working of the price mechanism, higher prices offer increased potential profits for new entrants even if their initial production costs are higher than the incumbent firms
• Existing firms may be content to control the flow of new firms coming into a market rather than engaging in strategies designed to block the entry of any new firm outright
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