A final interesting extension of the model proposed is incorporating the availability of learning-by-doing effects in the market. With country-specific learning-by-doing effects it is meant, that in the respective industry increas- ing sales volume in other countries does not change the efficiency of a firm in the respective host country market, such that efficiency of a firm in a market only increases with the volume of former (sales) experience in this specific market.
This extension is considered in a further simplified version of the basic model. We will see that, if learning-by-doing effects are strong for some kind of industry, M&A is actually the sequential entry deterring mode for early movers and therefore it is obvious that the threat of sequential entry leads early movers to rather enter the market via M&A compared to the benchmark case.
Assume for simplicity that in period T=1 all firms have marginal costs of c = 1. Further assume that incumbents have been in the market for such a long time that they have already used up all learning-by-doing effects available, such that cA = cB = 1 in both periods. The potential sequential entrant does by design not participate in the market inT = 1, so his marginal costs in T=2 are also c2 =c= 1.
For the early entering firm 1 assume that his marginal costs in period 2 are a function of how much 1 has sold in the market in period T=1. Specifically let us assume
c1(T = 2) =
1 ifx1(T = 1)<0,5
0 ifx1(T = 1)≥0,5
This is a very simple, special form of learning-by-doing effects, but the results can be generalized22. By assuming this specific form we can abstract
from any strategic selling behaviour of firm 1 in period 1 as well as reduce notational clutter.
3.5.1
Sales volumes in period T=1
With firms 1, A, B being symmetric in marginal costs and market size equal to 1 it is straightforward that the sales volume of firm 1 in period 1 isx1(T =
1) = 1
3 if 1 enters via Greenfield Investment and x1(T = 1) = 1
2 if 1 enters
via M&A.
Thereforec1(T = 2) = 1 if 1 enters via Greenfield and c1(T = 2) = 0 if 1
enters via M&A.
3.5.2
Sequential entry probabilities in period T=2
If F1 enters via Greenfield Investment results do not differ from the basemodel, as marginal costs of market participants are unchanged.
The probability of any entry as well as the absolute probability of entry via M&A is still P1 = 161t−F and P3 =−721t+OD+F respectively.
If F1 now enters via M&A the sequential entry probabilities differ from
the base model, due to the additional effect of M&A on marginal costs of firm 1.
The probability of any entry in T=2 is now23
22It is always true that first period sales will be higher for firm 1, if it enters via M&A
compared to Greenfield Investment. Therefore its marginal costs in the second period will always be lower if it enters via M&A compared to Greenfield Investment.
23One has to stay simple in this analysis, therefore I keep assuming that firms will
locate equidistantly from each other, which is a strict assumption, but actually even coun- terbalances our results, so the assumption does not drive our results. To be concrete, it is additionally assumed that the sequential entrant locates farthest away from the early entrant at the other side of the Salop circle with the two local incumbents in between.
P2 = 1 t 1 3t− 1 5 2 −F (3.25)
and the absolute probability of entry via M&A is now
P4 = 1 t " 1 2t− 1 3 2 −2× 1 3t− 1 5 2# +OD+F (3.26)
Analyzing probabilities we come up with the main interesting result of analysis of this extension.
Proposition 6
With learning-by-doing effects in the market and product differentiation low early-mover entry via M&A compared to entry via Greenfield deters se- quential entry. If product differentiation is high early-mover entry via M&A still accommodates sequential entry.
The proposition is proved in Appendix 9.
The intuition is straightforward. If product differentiation is of low de- gree, the base model-effect of entry deterrence via Greenfield through an increase in the number of market participants faced by a sequential entrant is small, as has been shown before. With learning-by-doing-effects entry via M&A leads to firm 1 being able to price more aggressively in period 2, due to lower marginal costs than under Greenfield Investment. This second ”‘effi- cient competitor”’effect then dominates the first ”‘more competitors”’ effect for sufficiently low levels of transport costs, as a more efficient competitor hurts potential sequential entrants in expectations more than a larger number of competitors.
The following figure shows how the respective probabilities of entry and entry modes depend on ”‘transport costs”’ t in this extension.
Figure 3.5: Contingent Sequential Entry Probabilities and Transport Costs 2 2,1 2,2 2,3 2,4 2,5 2,6 2,7 2,8 2,9 3 t P ro b ab ilit ie s P1 P2 P3 P4 For F=0,01; OD=0,05
How the threat of sequential entry then influences the entry mode choice of the early mover is obvious. As the threat of sequential entry already reduces the acquisition price to be paid by the early mover as well as the strategic entry deterring effect also favouring M&A entry it follows that
Proposition 7
In markets with low degrees of product differentiation and strong learning- by-doing effects the threat of sequential entry increases the relative probability of entry via M&A.