30 Questions
What is the primary reason firms can earn abnormal profits over long periods of time?
Absence of free entry into the market
According to Bain's definition, what is a barrier to entry?
An obstacle that prevents new firms from entering the market
What is the assumption of the Sylos postulate?
A potential entrant takes the existing output of that industry as given
What is a consequence of limit pricing in Modigliani's model?
No incentive for new entrants to enter the market
What type of barrier to entry involves incumbent firms having highly differentiated products and an established brand image?
Product differentiation barrier
What is the name of the model that explains how firms can use prices to prevent free entry?
Modigliani's Limit-Pricing Model
What is an assumption of Modigliani's model?
Perfect information about the industry's demand and costs structure
What is the purpose of investment as a signal of commitment, according to Dixit's Model?
To deter entry by new firms
Why does the incumbent firm have a cost advantage in Modigliani's model?
Due to better know-how, more efficient workforce, and access to cheaper inputs
What is the term for the process by which incumbent firms use their market power to maintain abnormal profits?
Entry deterrence
What is the shape of the Long-Run Average Cost (LRAC) curve in Modigliani's model?
L-shaped
What happens to the entrant's profits if Q > Qc in Modigliani's model?
The entrant earns abnormal profits
What is the condition under which the incumbent can deter entry in the Dixit model?
∏D –C < ∏W
What is the effect of the incumbent's investment in the Dixit model?
It makes the incumbent's threat to fight a price war more credible
What is the role of reputation in the Dixit model?
It can prevent entrance by other competitors if the incumbent has a reputation for being tough
What is the outcome of the game if the incumbent's threat to fight a price war is credible?
The entrant stays out of the market
What is the condition under which the incumbent can build up a reputation for being tough in the Dixit model?
If the incumbent faces the threat of entry period after period
What is the application of the Dixit model to the real-world scenario mentioned in the bibliography?
Supermarkets' land war
What is the definition of the limit price according to Bain?
The highest common price that the established seller(s) believe they can charge without inducing at least one potential competitor to enter
What is the mathematical formula for the limit price according to Bain?
PL = PC × (1 + m)
What is the assumption about the product in Modigliani's model of limit pricing?
The product is homogeneous
What is the shape of the Long Run Average Cost curve in Modigliani's model?
L-shaped
What type of industries often exhibit economies of scale?
Industries with high fixed costs, such as shipping or manufacturing
What is the term for the output level at which the average cost is minimized?
Minimum Efficient Scale (MES)
What is the main consequence of imperfect information on the part of the potential entrant?
The potential entrant might decide not to enter the market.
According to Bain's definition, what is the primary function of entry barriers?
To enable incumbent firms to earn abnormal profits without attracting competition.
What is the primary purpose of limit pricing, according to Modigliani's model?
To deter potential entrants from entering the market.
How can economies of scale help an incumbent firm?
By enabling the firm to set a price limit and earn abnormal profits.
What is the role of investment in the Dixit model?
It acts as a signal that deters the entrance of potential competitors.
What is the condition for entry deterrence in the Dixit model?
As long as πD – C < πW.
This quiz covers the topic of entry barriers and deterrence strategies in industrial economics, focusing on Modigliani's Limit-pricing model and how firms can use pricing to prevent free entry.
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