Question
The concept of Entry Deterring Price can be used to prevent new entrants in an industry by setting the price at a level where the rewards of entry are equal to the expected costs of overcoming barriers. If the existing or projected future price is higher than the Entry Deterring Price, new firms may be encouraged to enter the market. However, incumbent firms can prevent this entry by driving prices below the Entry Deterring Price. This strategy makes it economically unviable for new entrants to join the market, thus deterring their entry.
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The competition in an industry and the ultimate profitability of a firm depend on five fundamental competitive forces: ease of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among competitors. Competitive strategy aims to create a defensible position for the firm against the five competitive forces with offensive or defensive tactics. The threat of new entrants in an industry can be analyzed with Entry Deterring Price. The Entry Deterring Price is the price at which the rewards of entry are equal to the expected costs of overcoming barriers. New firms will enter if the existing or projected future price is higher than the Entry Deterring Price. Incumbent firms can prevent entry by driving prices below the Entry Deterring Price. Advantages like proprietary technology and favorable locations are hard to replicate for a new entrant regardless of size or economy of scale. In some industries, unit costs decline with experience as worke...
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