Incumbent firms

The advantages of firms being already established in an industry are examined in this short topic video.

Examine the advantages from being established in a market / industry

Incumbent firms are businesses already established in each market or industry.

Advantages

1. Established firms can achieve internal economies of scale which lower long run average cost and make them more competitive in price terms against potential rivals
2. Market intelligence and learning from being in the market allows them to move down their experience curve
3. Incumbent firms can build customer loyalty and brand recognition. This lowers the marketing costs of selling to existing consumers
4. Existing firms might have used a process of vertical integration to give them greater control of the supply chain in their industry

Moving down the experience curve -

The concept behind the Experience Curve is that the more experience a business has in producing a product, the lower its costs.

Evaluation points:

1. Later entrants into a market can avoid some of the mistakes made by the first mover
2. Many new rivals achieve scale and brand recognition in other industries which makes market entry easier
3. Existing firms may suffer a brain drain effect (losing skilled workers) or may start to suffer from diseconomies of scale.
4. Patent protection does not last forever – once a patent becomes generic, often lots of similar products enter an industry