LUBS 2050 Lecture 3: Entry Barriers and Deterrence Strategies
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Questions and Answers

What is the primary reason firms can earn abnormal profits over long periods of time?

  • Absence of free entry into the market (correct)
  • High demand for their products
  • Low production costs
  • 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 (correct)
  • A strategy used by incumbent firms to deter entry
  • A characteristic of a monopolistic market
  • A type of market structure

    • What is the assumption of the Sylos postulate?

  • There are multiple incumbent firms in the industry
  • The incumbent firm has a cost disadvantage with respect to the potential entrant
  • Incumbent firms will respond to entry by changing their output levels
  • A potential entrant takes the existing output of that industry as given (correct)

    • What is a consequence of limit pricing in Modigliani's model?

    <p>No incentive for new entrants to enter the market</p> Signup and view all the answers

    What type of barrier to entry involves incumbent firms having highly differentiated products and an established brand image?

    <p>Product differentiation barrier</p> Signup and view all the answers

    What is the name of the model that explains how firms can use prices to prevent free entry?

    <p>Modigliani's Limit-Pricing Model</p> Signup and view all the answers

    What is an assumption of Modigliani's model?

    <p>Perfect information about the industry's demand and costs structure</p> Signup and view all the answers

    What is the purpose of investment as a signal of commitment, according to Dixit's Model?

    <p>To deter entry by new firms</p> Signup and view all the answers

    Why does the incumbent firm have a cost advantage in Modigliani's model?

    <p>Due to better know-how, more efficient workforce, and access to cheaper inputs</p> Signup and view all the answers

    What is the term for the process by which incumbent firms use their market power to maintain abnormal profits?

    <p>Entry deterrence</p> Signup and view all the answers

    What is the shape of the Long-Run Average Cost (LRAC) curve in Modigliani's model?

    <p>L-shaped</p> Signup and view all the answers

    What happens to the entrant's profits if Q > Qc in Modigliani's model?

    <p>The entrant earns abnormal profits</p> Signup and view all the answers

    What is the condition under which the incumbent can deter entry in the Dixit model?

    <p>∏D –C &lt; ∏W</p> Signup and view all the answers

    What is the effect of the incumbent's investment in the Dixit model?

    <p>It makes the incumbent's threat to fight a price war more credible</p> Signup and view all the answers

    What is the role of reputation in the Dixit model?

    <p>It can prevent entrance by other competitors if the incumbent has a reputation for being tough</p> Signup and view all the answers

    What is the outcome of the game if the incumbent's threat to fight a price war is credible?

    <p>The entrant stays out of the market</p> Signup and view all the answers

    What is the condition under which the incumbent can build up a reputation for being tough in the Dixit model?

    <p>If the incumbent faces the threat of entry period after period</p> Signup and view all the answers

    What is the application of the Dixit model to the real-world scenario mentioned in the bibliography?

    <p>Supermarkets' land war</p> Signup and view all the answers

    What is the definition of the limit price according to Bain?

    <p>The highest common price that the established seller(s) believe they can charge without inducing at least one potential competitor to enter</p> Signup and view all the answers

    What is the mathematical formula for the limit price according to Bain?

    <p>PL = PC × (1 + m)</p> Signup and view all the answers

    What is the assumption about the product in Modigliani's model of limit pricing?

    <p>The product is homogeneous</p> Signup and view all the answers

    What is the shape of the Long Run Average Cost curve in Modigliani's model?

    <p>L-shaped</p> Signup and view all the answers

    What type of industries often exhibit economies of scale?

    <p>Industries with high fixed costs, such as shipping or manufacturing</p> Signup and view all the answers

    What is the term for the output level at which the average cost is minimized?

    <p>Minimum Efficient Scale (MES)</p> Signup and view all the answers

    What is the main consequence of imperfect information on the part of the potential entrant?

    <p>The potential entrant might decide not to enter the market.</p> Signup and view all the answers

    According to Bain's definition, what is the primary function of entry barriers?

    <p>To enable incumbent firms to earn abnormal profits without attracting competition.</p> Signup and view all the answers

    What is the primary purpose of limit pricing, according to Modigliani's model?

    <p>To deter potential entrants from entering the market.</p> Signup and view all the answers

    How can economies of scale help an incumbent firm?

    <p>By enabling the firm to set a price limit and earn abnormal profits.</p> Signup and view all the answers

    What is the role of investment in the Dixit model?

    <p>It acts as a signal that deters the entrance of potential competitors.</p> Signup and view all the answers

    What is the condition for entry deterrence in the Dixit model?

    <p>As long as πD – C &lt; πW.</p> Signup and view all the answers

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