Entry Deterring Price Framework
Price level that deters entry
The Entry Deterring Price Framework is a concept that describes the price level at which the potential rewards from entry are just balanced by the expected costs of overcoming structural entry barriers and risking retaliation. If the current price level is higher than the entry deterring price, entrants will forecast above-average profits from entry, and entry will occur.
- The entry deterring price is the price level that just balances the potential rewards from entry with the expected costs of overcoming structural entry barriers and risking retaliation.
- Incumbent firms can use the entry deterring price to their advantage by pricing below it to deter entry.
- The entry deterring price depends on entrants' expectations of the future and not just current conditions.
- Determine the entry deterring priceCalculate the price level at which the potential rewards from entry are just balanced by the expected costs of overcoming structural entry barriers and risking retaliation.Pro tipConsider the potential entrant's expectations of the future and not just current conditions.WarningFailing to accurately determine the entry deterring price can lead to incorrect strategic decisions.
- Price below the entry deterring priceIncumbent firms can use the entry deterring price to their advantage by pricing below it to deter entry.Pro tipConsider the potential impact on profitability and market share.WarningPricing too low can lead to reduced profitability and decreased market share.
Polaroid's basic patents on instant photography created a high entry barrier, but the expiration of these patents reduced the barrier and allowed new entrants like Kodak to enter the market.
The concept of entry deterring price was developed by Michael E. Porter as a way to understand the dynamics of industry competition and the strategies that firms can use to maintain their market position.