Threat of New Entrants

• Identifying new entrants is important because they can threaten the market share of existing competitors.
• One reason new entrants pose such a threat is that they bring additional production capacity.
• Unless the demand for a good or service is increasing, additional capacity holds consumers’ costs down, resulting in less revenue and lower returns for competing firms.
• new entrants have a keen interest in gaining a large market share
• new competitors may force existing firms to be more efficient and to learn how to compete in new dimensions
• The likelihood that firms will enter an industry is a function of two factors:

  barriers to entry

  retaliation expected from current industry participants
• Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter.
• high entry barriers tend to increase the returns for existing firms in the industry and may allow some firms to dominate the industry.
• firms competing successfully in an industry want to maintain high entry barriers in order to discourage potential competitors from deciding to enter the industry