To Deter a Potential Entrant, an Existing Firm in a Market

question 143

Multiple Choice

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. The firm can make this threat credible by limiting its own options, and possible actions of this type include:

• A) signing long-term sales contracts that commit the firm to high levels of output.
• B) building a very large factory that could potentially produce enough output to meet most of the market demand.
• C) signing long-term purchase contracts for large amounts of production inputs.
• D) all of the above

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Definitions:

Numeraire

A standard unit of measurement in economics used to express prices or monetary values, making it easier to compare different goods or services.

Pareto Optimal Allocations

Situations where no reallocation can make someone better off without making someone else worse off in an economy.

Edgeworth Box

A diagram used in microeconomics to show the distribution of resources or the outcome of trade between two parties.

Utility Function

An economic tool that describes how consumers rank different bundles of goods according to the level of satisfaction or utility those bundles provide.