Can And How Does The Entrant Succeed? Is The Incumbent ✓ Solved

Can, and how does, the entrant succeed? Is the incumbent

In your Managerial Economics textbook, we consider a sequential-move game in which an entrant is considering entering an industry in competition with an incumbent firm. There are several possibilities of how this sequential game will be played. We want to use the Froeb rule of "look ahead and reason back." Address the following: Can, and how does, the entrant succeed? Is the incumbent ever in control of this game? You may wish to review the old game known as Duopoly, as well as Antoine-Augustin Cournot, to help inform your post. Do not rely on Wikipedia, Investopedia, or any similar website as a reference or supporting source.

Paper For Above Instructions

In the realm of managerial economics, understanding the dynamics of competition between an incumbent firm and a potential entrant is crucial. Sequential-move games provide a framework for analyzing how these firms interact strategically over time. This discussion will explore the chances of success for the entrant and assess the control exerted by the incumbent in this competitive environment, utilizing the Froeb rule of "look ahead and reason back."

Sequential-Move Games

A sequential-move game is characterized by firms making decisions one after the other, where the actions of one firm can significantly influence the outcomes for the other. In the context of an industry with an incumbent firm and a potential entrant, the incumbent typically has the advantage of experience, established market presence, and customer loyalty, which can pose significant barriers to entry for the newcomer.

Entrant's Strategy for Success

For the new entrant to succeed in breaking into the market dominated by the incumbent, a carefully structured strategy is required. The "look ahead and reason back" approach implies that the entrant must anticipate the responses of the incumbent to various actions taken. Here are several critical strategies that an entrant might consider:

• Differentiation: If the entrant can offer a product or service that is sufficiently different from the incumbent’s, it may attract customers who are dissatisfied with the existing options.
• Cost Leadership: The entrant could aim to become a cost leader in the industry, offering lower prices that the incumbent may struggle to match without sacrificing their profit margins.
• Strategic Alliances: Forming partnerships with suppliers or other companies can enhance the entrant's market presence and reduce risks associated with high startup costs.
• Targeting Niche Markets: By focusing on underserved segments of the market, the entrant can build a loyal customer base before competing directly with the incumbent.

Assessing the Incumbent’s Control

The incumbent firm generally possesses significant control in this sequential-move game. Given their established market presence, incumbents can engage in strategic behavior that complicates the entrant's path to success. For example, they might:

• Preemptive Actions: The incumbent may lower prices or increase promotional efforts to deter the entrant from entering the market.
• Brand Loyalty: By leveraging existing brand loyalty, the incumbent can retain customers even when new competitors emerge.
• Economies of Scale: Incumbents often benefit from economies of scale, allowing them to produce goods at a lower average cost, which the entrant may struggle to match.

Strategic Considerations Using Cournot Duopoly Model

The Cournot model of duopoly offers insights into how firms may compete in quantities rather than prices. In this model, both firms decide on the quantity of output to produce, with the understanding that the quantity chosen by one firm affects the market price and, consequently, the profits of both firms. This model illustrates the interaction whereby:

• The incumbent may set a higher quantity of output in anticipation of the potential entrant, strategically lowering market prices to make it less profitable for the entrant to join the competition.
• The entrant's decision may hinge on its expectations regarding the incumbent's output level and the resulting market equilibrium.

Conclusion

In conclusion, while the incumbent usually holds substantial control in a sequential-move game, the potential for the entrant to succeed lies in strategic planning and execution. By differentiating offerings, aiming for cost leadership, and effectively navigating market dynamics, an entrant can carve out a path for success. Conversely, the incumbent's ability to preemptively act and leverage existing market advantages poses significant challenges to new entrants. Understanding these dynamics and strategic considerations is essential for any firm looking to thrive in a competitive market.

References

• Froeb, L. M., McCann, B. T., & Ward, M. R. (2019). Managerial Economics: A Strategic Approach. Cengage Learning.
• Cournot, A. A. (1838). Recherches sur les Principes Mathématiques de la Théorie des Richesses. A. T. D. Carré.
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• Barroso, P., & de Almeida, A. F. (2016). Entry deterrence strategies in an oligopoly with sequential entries. European Economic Review, 83, 54-73.
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