Hit-and-run entry

Definition

Hit-and-run entry refers to a strategy where a firm temporarily enters a market to gain profits and then exits quickly, taking advantage of favorable market conditions. This tactic is often employed in contestable markets where barriers to entry are low and the potential for high profits attracts new entrants who can leave as swiftly as they came if competition becomes too intense or costs rise.

5 Must Know Facts For Your Next Test

1. Hit-and-run entry typically occurs in industries with low sunk costs, enabling firms to leave the market without significant losses.
2. This strategy takes advantage of temporary market conditions, such as short-lived price increases or lower competition, which might not be sustainable in the long term.
3. Firms utilizing hit-and-run entry can disrupt established players by temporarily lowering prices, forcing them to react or risk losing market share.
4. The threat of hit-and-run entry can lead existing firms to maintain lower prices or improve services to deter potential competitors.
5. Hit-and-run entry highlights the importance of expectations in contestable markets, as existing firms must anticipate the potential for new entrants based on current market conditions.

Review Questions

• How does hit-and-run entry affect pricing strategies of existing firms in a contestable market?
  • Hit-and-run entry affects pricing strategies because existing firms may lower their prices to deter new entrants who might exploit temporary profit opportunities. The presence of potential competitors leads established firms to maintain competitive prices to minimize the risk of losing market share. This dynamic creates a more aggressive pricing environment that can benefit consumers but may also squeeze the profit margins of existing players.
• Evaluate the role of barriers to entry in facilitating or hindering hit-and-run entry in various markets.
  • Barriers to entry play a crucial role in determining the feasibility of hit-and-run entry. In markets with low barriers, new firms can easily enter and exit without incurring heavy costs, making hit-and-run strategies viable. Conversely, high barriers such as significant startup costs or regulatory hurdles can prevent potential entrants from taking advantage of temporary profit opportunities. Therefore, understanding these barriers is essential for analyzing market dynamics and competitive behavior.
• Assess the long-term implications of hit-and-run entry on market stability and competition in industries with fluctuating demand.
  • Hit-and-run entry can lead to instability in markets with fluctuating demand as it encourages firms to react quickly to transient profit opportunities. This behavior can create volatility in prices and service levels as new entrants disrupt established norms. Over time, such unpredictability might drive existing firms to innovate or adapt their offerings more aggressively, potentially leading to improved efficiency or better consumer options. However, if frequent entries and exits become common, it could also discourage investment and long-term planning among established players, ultimately harming overall market health.

Related terms

Contestable Market: A market structure where there are no significant barriers to entry or exit, allowing potential entrants to challenge existing firms without incurring heavy costs.

Barriers to Entry:

Obstacles that make it difficult for new competitors to enter a market, which can include high startup costs, regulatory requirements, or strong brand loyalty.

Perfect Competition:

A market structure characterized by many firms offering identical products, ensuring that no single firm can influence the market price, allowing for free entry and exit.