When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors.
The threat of entry in an industry depends on the height ofentry barriers that are present and on the reaction entrants can expect from incumbents
It is the threat of entry, not whether entry actually occurs, that holds down profitability.
Barriers toentry. Entry barriers are advantages that incumbents have relative to new entrants.
There are seven major sources:
1. Supply-side economies of scale. These economies arise when firms that produce atlarger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers. Supply-side scale economiesdeter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage.
In microprocessors,incumbents such as Intel are protected by scale economies in research, chip fabrication, and consumer marketing.
3. Customer switching costs.
The larger the switching costs, the harder it will befor an entrant to gain customers.
4. Capital requirements. The need to invest large fi nancial
resources in order to compete can deter new entrants.
Capital may be necessary not only for fi xedfacilities but also
to extend customer credit, build inventories, and fund startup
losses. The barrier is particularly great if the capital is
required for unrecoverable and therefore harder-to-finance
expenditures, such as up-front advertising or research and
5. Incumbency advantages independent of size. No matter
what their size, incumbents may have cost or qualityadvantages
not available to potential rivals. These advantages can
stem from such sources as proprietary technology, preferential
access to the best raw material sources, preemption of