Established firms may work
together to create barriers of entry for the new firm. Conditions within a
competitive environment that affect a company’s decision to enter into a market
or not are called barriers to entry. These barriers may make it easy or
difficult for a business to enter into the market and establish their presence.
There are many types of barriers to entry including those created by the
government, by the existing companies, by the nature of the business and by the
existing industry structure. One form of strategic deterrence that P and
J may use is predatory pricing; this would mean that they set the prices
of their shampoo below its actual profits. This would make it very difficult
for Halos n Horns to be successful within the market as customers are more
likely to purchase from the well-established brands, especially if they are
cheaper than the new entrant who they may not trust, ultimately driving them
out of the market. Once this end is achieved, they can simply raise prices back
up to former levels. An aggressive strategy, this method sends a clear signal
to the potential new entrant that strong retaliation can be expected in the
market. Though this method seems to be extreme in terms of the lost profit, it
has long term benefits of not only deterring the current new entrant threat but
also any future threats by establishing an aggressive reputation. Also, large
multi-product firms such as the ones mentioned will be able to manage the short-term
loss off profit with the sales revenue incurred from the vast number of other
products in provides.
Proctor and Gamble or Johnson and
Johnson may also decide to create their own new range of children’s shampoo.
They may choose to invest profits into creating a new formula for children’s
skin which is clinically proven to be beneficial or kinder to their skin,
through research and development. This reduce short term profits however, in
the long term and through the use of their reliable reputations they will
inevitably increase their market share, and halt that of Halos n Horns.
Customers are more likely to purchase from well known brands and more sceptical
especially regarding products for children. These established firms may use
their brand power and advertising expertise to promote their new range as ‘the
best haircare product for children’ for example. Since these firms have core
competencies with lie in the production of cosmetics, skincare and homecare may
consumers will be attracted to their new range rather than that of competitors.
They will also be able to charge a premium price which will increase profits
and may cover any costs they may have spent incurred through R. Customers
will be willing to pay extra for assured quality and the added value the
product will have from being part of these well-established firms and also the
advertisement of the R invested into the new product for children.
Firms within a market are more
than likely to either work together or use their power to control the pricing
of products within the market or release products to counter the sales of new
products by start up firms. This will ensure that the new firm is not able to
gain any market share or rival these companies. Firms must be careful however,
as the Competition and Markets Authority (CMA), may step in if it deems that
monopolies are being created i.e. if these firms joined together to take up
over 85% of the market, or that cartel activity was taking place, which is
where businesses make agreements with their competitors to fix prices, rig
bids, share markets or restrict outputs. Cartel behaviour is illegal as it reduces
choices and damages the economy.