Other factors will complicate the entry / expansion decision. We have talked about a situation where one firm is thinking about entry or expansion. In practice, there are likely to be several such firms, and costs of entry or expansion may well differ from one to another. There will be costs of making the entry decision, and these costs will be lower for some firms than others. A firm that distributes a number of consumer products through retail outlets will be able to make a fairly accurate assessment of the costs it will incur if it adds an additional product to its line. A manufacturing firm that has not done its own distribution will have less information about the cost of entry at the retail level. Firms in related product or geographic markets will have better information and lower costs of decision making than new firms.

The Entry Process

A firm seeking profitable investment is likely to have more information about some target industries than others. This being the case, the entry decision is likely to break down into a two – stage process. In the first stage, a firm considering expansion will identify industries that are likely prospect and about which it has enough information so that the decision – making costs are not prohibitive. In the second stage, the firm will study each target industry in detail and decide whether or not to enter.

Reprise

Limit price models emphasize the size of the market and the entrant’s costs, especially sunk costs of entry, as determinants of market performance. The greater the investment needed to enter the market, and the more specific to the industry are the assets necessary for entry, the greater the entry costs are likely to be. Vertical integration and product differentiation will raise sunk entry costs. In any event, the costs of making the entry decision will be sunk, and these costs will vary from entrant to entrant. An entrant will also need to consider the possible reaction of the dominant firm and of other rivals.