How Business Dynamics Evolve Over Time

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If we are to fully understand competition within a market, we must identify how business dynamics evolve over time and know the conditions that encourage or deter entry within a market. Entry is defined as the beginning of production and sales in a market (Besanko et al), with new firms incentivised to enter by the potential profits available within an industry. However this threat of entry is limited through the structural and strategic barriers embedded in the market, which limit the profitability of newcomers within an industry. ‘A barrier to entry is an advantage of established sellers in an industry over potential entrant sellers’ (Bain, 2008). When observing the American airline market it is clear that there are substantial barriers…show more content…
Timothy Dunne supports this in his affirmation that typical greenfield entrants don’t usually last 5 years within a market due to the assertion that survival and growth go hand-in-hand; new firms will have to source the capital to support expansion, which proves difficult when new airlines can’t access enough market share to be profit-making. The structural barriers to entry within the airline industry extend to significant sunk costs that new firms must overcome in order to operate profitably. Sunk costs are defined as an element of capital that is irretrievable on exit (Besanko et al). For PEOPLExpress to operate within the industry they would have had to acquire the necessary specialised capital equipment to provide the service (aircraft), government licenses, R&D into how to increase efficiency and advertising in order to attract demand. These extensive costs prove to be a big risk to any potential entrant, as there has to be some assurance that the ‘posentry profits’ made post-entrance will exceed the fixed and variable costs of providing the service. Furthermore, the contestability of the airline market is also determined by the extent to which incumbent firms benefit from the natural cost advantages of Economies of Scale. Established firms within the market can operate at/beyond the Minimum Efficient Scale (Besanko et al) thus giving them a substantial cost advantage over small entrants. These incumbents benefit from their reputable status within the
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