Non-pricing Strategies to Deter Entry: Preferable Alternatives to Pricing Strategies, Study notes of Organization Theory and Design

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Meng-Yu Liang Econ 165g

Chapter 11: Non-pricing strategies to deter entry This chapter studies non-pricing strategies to delay or prevent entry of competing firms. Why may non-pricing strategies be preferable to pricing strategies?

• They are less likely to raise antitrust concerns.
• They are less likely to be misinterpreted by competitors as aggressive acts.

From empirical evidence, non-pricing strategy to deter entry includes

• Building excess capacity:
  • Example: textbook Figure 11.1.
• Raising rivals’ Costs
  • The incumbent might lobby for a licensing fee to enter the industry
  • The imposition of mandatory pollution control devices
  • increased advertising
  • Example: See Figures 11.2 and 11. ∗ Given Ce = Ci, what is the lowest Ci to deter entry? Ci = 350. ∗ Given Ce = 2Ci, what is the lowest Ci to deter entry? Ci = 175.
• Learning by doing
  • Example: AC (q) = 10 + (^1002) λq , where λ is the speed of learning. See Figure 11.6. ∗ Note that if λ is very large or very small, the impact of the learning curve on competitive behavior becomes almost negligible.
• Product proliferation
  • The strategic decision to preempt potential entrants by creating brands to fill every available product niche.
  • Example: Kellogg’s can deter a new niche (such as “sugar-frosted grape-flavored corn flakes”) just before it is profitable for a potential entrant to enter that niche.

Homework: Q1-Q

1