Today’s classToday’s class

5. Strategic commitments5. Strategic commitments5.1 Sequential games and the logic of commitment5.1 Sequential games and the logic of commitment

5.2 Strategic commitment and competition5.2 Strategic commitment and competition

5.3 Entry deterrence 5.3 Entry deterrence

5.4 Entry strategies5.4 Entry strategies

Entry from the perspective of the Entry from the perspective of the entrant:entrant:

The paradox of entry barriers:The paradox of entry barriers:– A high barrier means you can’t get in.A high barrier means you can’t get in.

– A low barrier means profits are low. Why enter then?A low barrier means profits are low. Why enter then?

Solution: entry is attractive if entrant can scale entry Solution: entry is attractive if entrant can scale entry

barriers more cheaply than others.barriers more cheaply than others.

Entry StrategiesEntry Strategies

Most entrants are small Most entrants are small Aim: make aggressive reaction by incumbents less Aim: make aggressive reaction by incumbents less

likelylikely Increase expected cost of driving entrant outIncrease expected cost of driving entrant out

– Signal determination to stay inSignal determination to stay in

– Signal willingness to fightSignal willingness to fight

Decrease expected benefit of driving entrant outDecrease expected benefit of driving entrant out– Stay small and/or differentiateStay small and/or differentiate

Judo Economics = Use rival’s strength Judo Economics = Use rival’s strength and inflexibility to your advantageand inflexibility to your advantage

More specifically, stay small or differentiate to discourage More specifically, stay small or differentiate to discourage

incumbent from going after youincumbent from going after you Logic:Logic:

– If you enter with low price and try to get large share of market, strong If you enter with low price and try to get large share of market, strong

incumbent will fight back => you loseincumbent will fight back => you lose

– Suppose you enter with small capacity instead.Suppose you enter with small capacity instead. If the incumbent matches, gets lower margin on all customersIf the incumbent matches, gets lower margin on all customers Incumbent may be better off leaving small share of market to you!Incumbent may be better off leaving small share of market to you!

– Related: United vs. TWA’s response to AA’s Value PricingRelated: United vs. TWA’s response to AA’s Value Pricing Works even if entrant has neither cost nor benefit advantageWorks even if entrant has neither cost nor benefit advantage

Example: Example: Fox’s Fox’s entry in TV entry in TV network market in 1986network market in 1986

Began with only two hours of late-night programming Began with only two hours of late-night programming

(instead of prime-time): signal intention to stay small(instead of prime-time): signal intention to stay small Targeted a young urban audience (instead of family): Targeted a young urban audience (instead of family):

differentiatedifferentiate The role of Murdoch’s reputation as empire-builder: The role of Murdoch’s reputation as empire-builder:

signal determination to stay in, rationally or notsignal determination to stay in, rationally or not Public statements about NewsCorp’s cash reserves & Public statements about NewsCorp’s cash reserves &

Fox’s willingness to take losses: signal determination to Fox’s willingness to take losses: signal determination to

fight if necessaryfight if necessary Moves that reduced networks’ incentive to fight FoxMoves that reduced networks’ incentive to fight Fox

Other examplesOther examples

MinnetonkaMinnetonka’s introduction of ’s introduction of SoftsoapSoftsoap in 1980 in 1980– P&G etc. were reluctant to enter brands in detergent categoryP&G etc. were reluctant to enter brands in detergent category

Integration of U.K. supermarkets into retail gasoline in Integration of U.K. supermarkets into retail gasoline in

early 1990s (a failed attempt at Judo…)early 1990s (a failed attempt at Judo…)– Low prices to lure customers to supermarketsLow prices to lure customers to supermarkets

– Perhaps hoped that Shell etc. would not respond, but they did.Perhaps hoped that Shell etc. would not respond, but they did.

CaveatsCaveats

1.1. There needs to be reason why targeted matching by There needs to be reason why targeted matching by

incumbent is not possibleincumbent is not possible– E.g. “rule” about same price for all customersE.g. “rule” about same price for all customers– Value-based connection between market segments, e.g. risk Value-based connection between market segments, e.g. risk

of jeopardizing main brandof jeopardizing main brand

2.2. Entrant needs to convince incumbent of intention to Entrant needs to convince incumbent of intention to

stay smallstay small– Was Value Pricing triggered by entry of Braniff Airlines in Was Value Pricing triggered by entry of Braniff Airlines in

Dallas (see BDSS)?Dallas (see BDSS)?

3.3. Judo strategies often buy valuable time, but do not Judo strategies often buy valuable time, but do not

directly create sustainable competitive advantagedirectly create sustainable competitive advantage