Entry deterrence

Question 1

True or false:

Expanding production capacity to deter entry will only effectively discourage new competitors if the incumbent firm has invested significantly in the expansion in a way that cannot be easily undone or recovered (sunk costs).

Answer 1

True, If the new competitors know that the incumbent firm’s costs are not recoverable, they will take the threat of oversupply seriously, as the incumbent firm has a strong financial disincentive to reduce production later, making the strategy a believable deterrent.

Question 2

What are product proliferation and contracts examples of?

Answer 2

Entry deterrence:

Product proliferation (offering a wide variety of products to fill niche markets and prevent new entrants from finding a foothold) and contracts (perhaps exclusive deals or long-term commitments with suppliers or customers) as methods to deter entry.

Question 3

Despite the ease of entry, sometimes the number of firms in an industry remains constant, why could this be?

Answer 3

Strategies like product proliferation, where the cost of entry (developing new products) does not justify the potential revenue due to the dominant position of incumbents.

Question 4

True or false:

Contracts can be seen as an “entry fee” strategy,

Answer 4

True