Entry Deterrence Strategies Research Articles

How does innovation disclosure respond to heightened entry threats?

Employing the deregulation of market entry barriers in China as a quasi-natural experiment, this study examines the impact of increased entry threats on firms’ innovation disclosure strategies. We find that, in response to heightened entry threats, incumbent firms strategically intensify their innovation disclosure. This strategic disclosure emphasizes incumbent firms’ competitive advantages in innovation while omitting detailed information that allows rivals to replicate their technologies. Additionally, the positive relation between heightened entry threats and innovation disclosure is mitigated by government ownership, product market competition, and firm size. Our study underscores the role of innovation disclosure as an entry deterrence strategy.

Entry deterrence strategies for an incumbent supply chain in the presence of inertial consumer and optimistic entrant

AbstractWhen entering a new market, entrepreneurs generally hold an optimistic belief about the inertia of consumers (i.e., consumer's tendency to repurchase the incumbent product), leading to a high rate of failure. This paper constructs a supply chain with one manufacturer, one retailer, and one potential optimistic entrant who attempts to enter the wholesaling market. We characterize how the behaviors of the entrant's optimism and consumer's inertia jointly affect the pricing (deterrence) strategy of the incumbent manufacturer, entry strategy of the entrant, and equilibrium decisions in the post‐entry game. Interestingly, our results show that: (i) in the post‐entry game, both behaviors could benefit the two manufacturers but are detrimental to the retailer; (ii) in the entry strategy, when consumers are moderately inertial or the entrant is highly optimistic, the entrant will suffer from an incorrect entry decision and then has an unprofitable entry; (iii) in the pricing strategy, the incumbent manufacturer will set the normal wholesale price to blockade the entry if consumers have high inertia or the entrant has a low optimism; otherwise, he will set a new price to accommodate the entry. Furthermore, we discuss two different cases, finding that (iv) the existence of the retailer weakens the deterrent power of the incumbent manufacturer; and (v) the retailer will induce the manufacturer to accommodate the entry when the entrant is moderately optimistic.

Entry deterrence due to brand proliferation: Empirical evidence from the German interurban bus industry

We empirically study a potential entry deterrence strategy by means of product proliferation (pre-emption) in the German interurban bus industry using route-level data covering about 6,000 routes. In 2016, the largest operator, Flixbus, acquired its major rival, Postbus. We find that Flixbus, on average, provided a lower number of trips per route and day (frequency) and slightly decreased prices after the acquisition. Our findings are consistent with the interpretation that Flixbus pursued a strategy of pre-emption prior to the acquisition: Flixbus offered a high number of bus rides to decrease residual demand. After the acquisition, when the threat of entry was eliminated, Flixbus decreased the supply of trips per route and day. We would like to thank two anonymous referees and Frank Verboven for helpful comments and suggestions. We would also like to thank Niklas Dürr, Georg Götz, Justus Haucap, Paul Heidhues, Sven Heim, Michael Hellwig, Henry Thecat, Peter Winker and the participants of the following conferences: EARIE Annual Conference 2018, VfS Annual Conference 2018, MaCCI Annual Conference 2019 and CRESSE Conference 2019 for fruitful discussions on earlier versions of this article.

Piracy as an entry deterrence strategy in software market

Piracy is commonly believed to be detrimental to legal suppliers, so strong enforcement against piracy is expected. However, in practice, some companies do not deter piracy actively which seems counterintuitive. To explore the rationale behind the uncommon phenomenon, this paper explores the piracy issue from the entry deterrence perspective. In particular, we study an incumbent’s entry deterrence strategy using piracy when facing a potential entrant who offers similar products in the market. The incumbent decides whether to deter the piracy, and the entrant chooses whether to enter the market by anticipating the competition in the potential market and the entry cost. By analyzing the strategies of both the incumbent and the entrant, we find that deterring piracy is not always a good strategy since piracy could be used as a deterring strategy on the entrant, which explains the practices in many companies. Specifically, we find that when the entry cost is moderate, the incumbent accommodates piracy when the entrant is more of a threat, and piracy serves as a partner of the incumbent to prevent the entry of a powerful entrant. This conclusion also holds when considering the entry deterrence cost, network effect and the entrant is a high end substitute.

Welfare effects of open access competition on railway markets

In recent years, several countries have deregulated passenger railway markets to allow open access. The aim is for competition to lower fares and increase quality of service, thereby increasing demand, economic efficiency and overall social welfare. We use a stylised simulation model to study how open access competition affects fares, demand, supply, consumer surplus and operator profits compared to a profit maximising monopoly and to a welfare maximising benchmark situation. We conclude that aggregate social welfare increases substantially when going from profit maximising monopoly to duopoly competition, as consumers make large gains while operators’ profits fall. It matters how the infrastructure manager sets the timetable based on operators’ capacity requests: the infrastructure manager should strive to increase competition by mixing competing operators’ departures as much as possible. According to simulations, there generally exists a stable competitive Nash equilibrium with two or more profitable operators. Although operators are identical in the model setup, the Nash equilibrium outcome is asymmetric: one operator has more departures and higher average fares than the other does. If operators are allowed to cooperate, however, for example by trading or selling departure slots, the equilibrium situation tends to revert to monopoly. The regulatory framework must therefore prevent collusion and facilitate market entry. Even the potential for competitive entry tends to increase social welfare, as the monopolist has incentives to increase supply as an entry deterrence strategy.

The drivers of coal overcapacity in China: An empirical study based on the quantitative decomposition

To examine the driving factors behind coal overcapacity in China, we attempt to reveal the drivers of the supply-side natural excess capacity (NEC) and demand-side cyclical excess capacity (CEC). We analyzed the drivers using cost and demand curves, and then tested the theoretical hypotheses using the appropriate data. The results show that, on the supply side, the NEC is affected by the entry deterrence strategy, the firms’ factor hoarding under the expected future demand fluctuations, and government investment incentives. The first two factors enhance the NEC, whereas the last factor reflects its motive and ability. Its motive promotes the NEC directly, and it does so by enhancing the propulsive effect of its ability on the NEC. On the demand side, the CEC is influenced by demand shocks. Economic growth has a negative relationship with the CEC. The regulation of interest rates and other countercyclical policies are beneficial to the process of stabilizing the CEC fluctuations. Therefore, governments should formulate their policies based on a scientific judgment of the factors inherent to the NEC and CEC, build a new and improved system to evaluate the performance of local government officers, and formulate a de-capacity plan based on the expected future demand when necessary.

Entry under an Information‐Gathering Monopoly

The effects of information‐gathering activities on an entry model with asymmetric information are analysed. The baseline game is a classical entry game where an incumbent monopoly faces potential entry by a firm without knowing for certain whether this potential entrant is weak or strong. If the entrant decides to enter, the incumbent must compete with him and decide whether to accommodate or to fight. The paper extends this entry game and considers that the monopoly credibly informs the entrant that she is able to gather information about his type if he finally enters the market, thereby helping her to better decide whether to accommodate or fight. Since knowing this might reduce the entrant’s willingness to compete with her, we focus the analysis on the effectiveness of this monopoly’s communicative action as an entry deterrence strategy. The results suggest that such an action is effective regardless of the precision of the Intelligence System (IS) only for a relatively low payoff gained by the entrant from competing with the incumbent. For higher payoffs for the entrant, the effectiveness of this action requires a considerably accurate IS.

How the source of the entrant's advantage limits entry‐deterring tying

AbstractI revisit a simple model of entry‐deterring tying—example 1 from Whinston's (1990) seminal paper—but allow the potential entrant to have either a cost advantage or a willingness‐to‐pay (WTP) advantage relative to the incumbent. I show that, compared to the usual case in which the potential entrant is cost‐advantaged, tying is less effective against an entrant with a WTP advantage because an entrant with a large WTP advantage may be able to induce the buyer to buy both the tied bundle and the entrant's product. I also show that tying but failing to deter entry can be less costly when facing an entrant with a WTP advantage than when facing an entrant with a cost advantage. For a firm facing uncertainty about, for example, the entrant's entry costs, this makes tying a more attractive entry deterrence strategy against a WTP‐advantaged entrant. These results shed light on the important policy question of which markets are most likely to be susceptible to entry‐deterring tying.

A Model of Competition Between Perpetual Software and Software as a Service

Software as a service (SaaS) has grown to be a significant segment of many software product markets. SaaS vendors, which charge customers based on use and continuously improve the quality of their products, have put competitive pressure on traditional perpetual software vendors, which charge a licensing fee and periodically upgrade the quality of their software. We develop an analytical model to study the competitive pricing strategies of an incumbent perpetual software vendor in the presence of a SaaS competitor. We find that, depending on both the SaaS quality improvement rate and the network effect, the perpetual software vendor adopts one of three different strategies: (1) an entry deterrence strategy, (2) a market segmentation strategy, or (3) a sequential dominance strategy. Surprisingly, we find that vendor competition does not always result in higher consumer surplus, and it might lead to a socially inefficient outcome under certain conditions. We further show insights into how the incumbent perpetual software vendor can defend its market position by providing incremental quality improvement through patching and/or by releasing consecutive versions with major quality upgrades. Finally, we extend our model to include the vendor’s quality improvement cost and users’ switching cost. These additional analyses help to identify the effect of different quality and cost factors on the market competitive equilibrium.

Free in-network pricing as an entry-deterrence strategy

This paper analyzes the entry-deterring power of free in-network pricing with multiple incumbents. Free in-network pricing may deter entry since it creates network externality that intensifies competition. One may expect that a particular entry-deterrent strategy adopted by all incumbents would have more entry-deterring power than when it is adopted by some incumbents only. However, we show that when free-in network plan has entry-deterrence power with two incumbent firms, sometimes one incumbent offering free in-network plan may have more entry deterrence power than both firms offering free in-network plans. In other words, we find that an asymmetric adoption of entry-deterrence strategies by the incumbent firms may be the best for entry deterrence. This result highlights the importance of the strategic choice of the pricing plan as a function of not only the likelihood/cost of entry but also of the plan choices of other firms, and may partially explain the asymmetric strategies used by competing firms.

Entry deterrence and hidden competition

This paper studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies.We show that due to hidden competition the follower is more eager to invest. As a result, an entry deterrence strategy of the leader becomes more costly, and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower׳s entry does not occur for a wide range of parameters values.

Quality and entry deterrence

We analyze the role of quality, which we define as an attribute of a product that increases consumers’ willingness to buy, as a competitive tool in a quality-price setting. We consider an incumbent’s entry-deterrence strategies using quality as a deterrent when faced by a potential entrant. We investigate settings motivating the incumbent to blockade the entrant (i.e., prevent entry without extra effort), deter the entrant (i.e., prevent entry with extra effort), or accommodate the entrant (i.e., allow the entry to take place). We identify conditions under which the incumbent may actually over-invest in quality to deter entrance. More interestingly, we also identify conditions under which the incumbent may decrease his quality investment to make it easier for the entrant to penetrate the market. Our model sheds light on entry scenarios of particular platform product markets such as the entry of Xbox to the video game console market.

Strategic Quality and Price Positioning of Delivery Services

We analyze the profit optimal strategic positioning of new delivery services. Competing logistics service providers specify the service quality positioning of their offering upon market entry and subsequently compete on price. We represent this situation via a singleperiod spatial competition model with free anticipated and/or unanticipated entry of up to n non-cooperative players. Assuming quality positioning to be strategic and irreversible, we use a Stackelberg-Nash equilibrium approach where we implicitly account for price elasticity of demand for innovative delivery services by introducing a default offering in the market. Competitors face delivery cost determined by chosen service quality and obtained market share. In this setting, we derive optimal quality positioning and pricing policies for all players and analyze the effects of changes in the competitive landscape and of a shift in customer preferences on player behavior and profitability. By calibrating our model with operating data of the French national postal operator La Poste and applying it to a real-world decision problem regarding the introduction of an innovative urban delivery service in the city of Nantes, we demonstrate its managerial relevance. We show that cost structure disparities among competitors may have significant effects on their optimal quality positioning. An exogenous fixed cost may encourage competitors to pursue entry deterrence strategies.

The Equivalence of Bundling and Advance Sales

We show that a monopolist's problem of optimal advance selling strategy can be mathematically transformed into a problem of optimal bundling strategy if four conditions hold: i. consumers and the firm agree on the probability of the states occurring, ii. the firm pre-commits to the spot prices to be charged in the advance selling stage, iii. consumers are risk-neutral, and iv. consumers and the firm do not have time preferences or when they do have time preferences, they discount future at the same rate. The result allows both researchers and practitioners to apply the insights from the well-developed vast literature on bundling to advance selling problems. In particular, we show that advance selling is more profitable than spot selling when consumer valuations across the states are independent or negatively dependent or positively dependent up to a point. We furthermore illustrate the effect of advance selling on the spot prices and consumer welfare: When the firm offers advance selling discounts, it sets higher spot prices, so consumers who do not buy in advance are worse off due to the firm offering advance selling discounts. We extend our analysis to the cases of more than two states and competition only in one of the states. We also show how advance selling can be used as an entry deterrence strategy.

Multi-sourcing as an entry deterrence strategy

This paper studies the rationale for multiple sourcing. In a simple model of outsourcing that embodies technology transfer and the threat of competition from the supplier(s) due to imitation, we show that multiple sourcing helps to deter entry by the suppliers into the final goods market and enhances profitability of the outsourcing firm. Our explanation for multiple outsourcing differs from the standard arguments, which either reduce the double marginalization problem or eliminate supply bottlenecks.

The Equivalence of Bundling and Advance Sales

We show that a monopolist's problem of optimal advance selling strategy can be mathematically transformed into a problem of optimal bundling strategy if four conditions hold: i. consumers and the firm agree on the probability of the states occurring, ii. the firm pre-commits to the spot prices to be charged in the advance selling stage, iii. consumers are risk-neutral, and iv. consumers and the firm do not have time preferences or when they do have time preferences, they discount future at the same rate. The result allows both researchers and practitioners to apply the insights from the well-developed vast literature on bundling to advance selling problems. In particular, we show that advance selling is more profitable than spot selling when consumer valuations across the states are independent or negatively dependent or positively dependent up to a point. We furthermore illustrate the effect of advance selling on the spot prices and consumer welfare: When the firm offers advance selling discounts, sets higher spot prices, so consumers who do not buy in advance are worse off due to the firm offering advance selling discounts. We extend our analysis to the cases of more than two states and competition only in one of the states. We also show how advance selling can be used as an entry deterrence strategy.

DISUASIÓN DE ENTRADA, SUBASTAS REPETIDAS Y DIVISIBILIDAD DEL OBJETO EN VENTA

Este trabajo analiza estrategias de disuasion de entrada en una secuencia de subastas tipo inglesa, con venta de multiples derechos de produccion. Esto, motivado por intentos de entrada infructuosos observados en algunas de las subastas anuales de derechos de pesca ocurridas desde inicios de los anos 1990 en la pesqueria industrial del Bacalao de Profundidad en Chile. Se analizan condiciones parametricas bajo las cuales las firmas incumbentes podrian haber logrado disuadir entrada en forma no cooperativa, o bien habrian requerido coludirse para tal fin. Se desarrolla un modelo con dos etapas de competencia. En la primera etapa se subastan secuencialmente multiples derechos de pesca; en la segunda etapa, esos derechos se usan para competir en un mercado Cournot de bien homogeneo. El analisis se focaliza en la relacion entre numero de incumbentes, fuentes de ventaja competitiva para estos y el numero y tamano productivo de multiples derechos de pesca en venta. El enfasis esta en analizar como la divisibilidad del objeto en venta afecta las posibilidades de los incumbentes para disuadir la entrada de nuevos rivales.

Union duopoly with heterogeneous labor: the effect of minimum wage regulation

PurposeThe purpose of this paper is to analyse the labor market outcome when there are two unions in the industry, representing heterogeneous workers – substitutes or complements in production – and using wage strategies, in the presence of minimum wage regulation.Design/methodology/approachThree strategic environments are considered: symmetric Bertrand‐Nash duopoly, Stackelberg duopoly, and efficient cooperation between the two unions.FindingsUsually, minimum wage legislation (floor) would decrease employment; it is shown that in Stackelberg environment, minimum wage legislation may induce an increase in total employment. Wage‐pushing strategies by a leader may also arise; and if workers are substitutes, entry deterrence strategies by the leader may be observed.Originality/valueThis paper analyses the impact of minimum wages in duopoly scenarios in an extensive way.

Legitimacy-Based Entry Deterrence in Inter-Population Competition

Integrating institutional theory with research on competitive entry deterrence strategies, I develop a theory of competitive social norm manipulations and explore the strategies that well-established organizational populations use to build legitimacy-based barriers to entry into their domain. The study shows that, through social norm manipulations, organizational populations can influence not only their own legitimacy but also the legitimacy of their competitors. I develop a typology of legitimacy manipulation strategies that established organizational populations use to prevent, eradicate or palliate the new entrants’ impact by: (1) changing the relative importance of legitimacy dimensions, (2) raising the legitimacy threshold and (3) altering perceptions of competitors’ performance. Successful legitimacy manipulations are shown to lead to institutional immunization of the incumbents against similar competitive challenges in the future.

Property, Liability and Market Power: The Antitrust Side of Copyright

Abstract This paper investigates the interplay between copyright law and antitrust law in two distinct respects. We first argue that the origin of copyright seems to be rooted not only in the need to foster the production and the spread of knowledge but also in the necessity of limiting market power on the side of distributors. We then show the potential impact on market competition of the evolution of copyright as a property rule. While property rules reduce transaction costs in the standard case of bilateral monopoly over the exchange of information goods, they might increase transaction costs. When coupled with market power, a property rule enables the right holder to control uses and prices so as to implement entry deterrence strategies against potential competitors. Conversely, we argue that reversing property rules in favor of competitors or switching to liability rules for copyright may restore competitive outcomes. This conclusion brings new insights on the application of the essential facility doctrine to copyrighted works.