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ACCA Strategic Professional · Strategic Business Leader · Competitive forces

Lumos Streaming, an incumbent, is considering cutting prices heavily after learning a rival plans entry. Which statement best describes how expected retaliation and exit barriers relate to the entrant's decision, as in Porter's analysis?

Expected strong retaliation by incumbents is itself a barrier to entry. If entrants believe the incumbent will cut prices or promote heavily, they expect lower returns and are deterred, so a credible retaliation threat lowers the threat of new entrants.

  1. ALikely strong retaliation by incumbents is itself a deterrent to entry, so a credible threat can reduce the threat of entrantsCorrect
  2. BRetaliation by incumbents is irrelevant to entry because only cost barriers matter
  3. CRetaliation increases the attractiveness of entry because prices fall
  4. DHigh exit barriers for the entrant make entry more likely, since it cannot leave

Explanation

Expected retaliation, such as price cutting or heavy promotion, is recognised as a barrier because entrants anticipate lower returns. Cost barriers are not the only ones. Falling prices reduce profit and so deter entry. High exit barriers increase the risk of entering, which discourages it.

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