Economics Dictionary of ArgumentsHome
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| Market entry: Market entry in economics refers to the process by which a company or firm starts operating in a new market. This can involve launching new products, establishing distribution channels, or overcoming barriers like competition, regulation, and capital requirements. Successful market entry strategies aim to gain market share and compete effectively with existing firms. See also Firms, Business, Competition, Markets._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Dictionary of Arguments. | |||
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Gernot Klepper on Market Entry - Dictionary of Arguments
Krugman III 101 Market entry/Krugman/Baldwin/Klepper: Large commercial aircraft production is one of the areas in which the States accuses European governments of unfair trade practices. Airbus Indus trie is undoubtedly heavily supported by subsidies from all participating countries. >Subsidies, >Competition, >International trade, >Government policy, >Interventions, >Interventionism, >New trade theory. Market entry: The cause for these payments was the decision of European governments in the late 1960s to support the entry of a European competitor in the market for large transport aircraft. This government-supported market entry and the exchange rate guarantees make it an interesting goal to analyze the strategic trade policy issue of European government intervention. Krugman III 102 One aspect of this competition between European and American producers was examined by Baldwin and Krugman (1988)(1), who developed a simulation model for the entry of the Airbus A300 in the market for medium- to long-range wide-bodied jet aircraft. At that time, Airbus was in an ambiguous situation: it was a new entrant to the overall market for large transport aircraft competing with well-established firms, but it was the first to enter the market segment for which the A300 was designed, whereas deliveries of Boeing’s new 767 started six years later. Baldwin and Krugman explained this situation of being a first-mover and at the same time having little chance to make profits on the A300 by cost differences between Airbus and Boeing-that is, Airbus had an approximately 17 percent higher unit cost at the same scale of production (1988(1),25). This apparent cost disadvantage has been attributed by company officials to accumulated learning effects in the production of other aircraft types. They claim that such economies of scope account for Airbus’s lack of success, hence the decision to develop the A320/321 and A330/340 in order to supply a complete family of aircraft. One purpose of this paper is to look at the effects of the market entry of Airbus by taking into account the complete family of aircraft. The simulation model of Baldwin and Krugman(1) uses government support that essentially supports the fixed costs of start-up investments and thus enables the firm to accept a lower than average profitability or even losses. Direct production subsidies, which have been minor in the past, seem to have become more important with the devaluation of the dollar. If the dollar stays at the fall I990 level there will be substantial subsidies to be paid, at least by the German government. The comparative advantage of the American civil aircraft industry will deteriorate, and political pressures on the U.S. government to retaliate against such policies will increase. The already ongoing dispute about aircraft subsidies will most likely intensify. >Subsidies, >Competition, >International trade, >Government policy, >Interventions, >Interventionism, >Industrial policy. 1. Baldwin, Richard, and Paul R. Krugman. 1988. Industrial policy and international competition in wide-bodied jet aircraft. In Trade policy issues and empirical analysis, ed. R. E. Baldwin. Chicago: University of Chicago Press. - - - Krugman III 106 Market entry/aviation/Klepper: Entry in a market such as the one for large transport aircraft is an expensive and time-consuming effort. Dynamic and static economies of scale together with economies of scope give incumbent firms a considerable competitive advantage. It is therefore not surprising that the market entry of Airbus was accompanied by the heavy involvement of European governments. >Government policy. In this situation, market entry can be viewed as the first stage of a three-stage decision process. 1) First, commitment by European governments to subsidize the launch of a new aircraft was necessary since, apparently, financing on capital markets without state support was not possible. 2) Second, firms had to decide which market segment to enter, and they had to choose a capacity which would allow them to capture the learning effects of large-scale production and at the same time keep prices at a profitable level. 3) Finally, once the first two decisions were made, firms had to compete with the other producers in the day-to-day business of selling their product. The first decision must be made under great uncertainty, and not only economic but also political arguments govern this process. Industrial policy aspects such as civil-military interaction in the aerospace industry were important. From the perspective of European firms, government support turned out to be essential. Not only is the financial burden for the launch of a completely new aircraft high, but the commitment by governments to support market entry could also prevent incumbent firms from starting a price war in the hope of stripping the entrant of its financial resources (Brander and Spencer 1983)(1). When the Bonner Protokoll of September 1967 gave British, French, and German governmental support to the launch of the A300 (Berg and Tielke-Hosemann 1987(2), 1988(3)), the first-stage was considered finished. Krugman III 107 Subsidies: The political decision in the 1960s to support a European civil aircraft industry by subsidizing the development of one new aircraft, the A300, has over time turned into the need to subsidize the market entry of a producer of a complete family of aircraft. Subsidies and guarantees are given today for the development and launch of the A330 and the A340, but this is not necessarily the last step. Airbus has not yet internalized learning and scale effects in the same way as the established producers. The cost disadvantage of later market entry still exists. Airbus competes in market segments in which Boeing has already realized large learning effects and is able to produce at lower marginal cost. Such a situation invites governments not only to support market entry but to subsidize the domestic firm in order to capture rents from the foreign firm. Brander and Spencer (1985(4)) have shown that in a Cournot-Nash game subsidies paid by one government to its domestic producer who is selling its products in a third country increases profits and welfare. >Profit, >Welfare, >Cournot Competition, >Bertrand Competition, >Equilibrium, >Nash Equilibrium, >Subsidies. Market entry/subsidies: (…) fixed-cost subsidies do not affect the capacity decisions of the producers. Government support, therefore, only makes credible that the entrant will stay in the market even if entry is not profitable over the planning horizon. Entry-deterring pricing strategies by the incumbent producer are therefore not rational. >Industrial policy. 1. Brander, James A, and Barbara J. Spencer. 1983. International R&D rivalry and industrial strategy. Review of Economic Studies 50:707-22. 2. Berg, Hartmut, and Notburga Tielke-Hosemann. 1987. Branchenstudie Luftfahrtindustrie: Der Markt für Großraumflugzeuge des zivilen Luftverkehrs. Dortmunder Diskussionsbeitrage zur Wirtschaftspolitik, no. 24. Universitat Dortmund. 3. Berg, Hartmut, and Notburga Tielke-Hosemann. 1988. Vom Glanz und Elend staatlicher Technologieforderung: Das Projekt “Airbus.” Dortmunder Diskussionsbeitrage zur Wirtschaftspolitik, no. 27. Universitat Dortmund. 4. Brander, James A, and Barbara J. Spence. 1985. Export subsidies and international market share rivalry. Journal of International Economics 18:83-100. Gernot Klepper. „Industrial Policy in the Transport Aircraft Industry.“ In: Paul Krugman and Alasdair Smith (Eds.) 1994. Empirical Studies of Strategic Trade Policy. Chicago: The University of Chicago Press._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. "Vs" indicates differences in content, not necessarily the chronological progression of a controversy. If a German edition is specified, the page numbers refer to this edition. |
Klepper, Gernot EconKrug I Paul Krugman Volkswirtschaftslehre Stuttgart 2017 EconKrug II Paul Krugman Robin Wells Microeconomics New York 2014 Krugman III Paul Krugman Alasdair Smith Empirical Studies of Strategic Trade Policy Chicago: The University of Chicago Press 1994 |
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> Counter arguments against Klepper
> Counter arguments in relation to Market Entry
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