Multiple Choice
For a best-cost provider strategy to be successful in competitive markets, a company must have:
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Potential entrants are more likely to be deterred from actually entering an industry when:
A
demand for the product is perfectly elastic
B
there are no barriers to entry
C
the market price is above average total cost for all firms
D
existing firms have significant cost advantages over new entrants
Verified step by step guidance1
Understand the concept of entry deterrence: Entry deterrence occurs when existing firms take actions or have characteristics that discourage potential new firms from entering the market.
Analyze the role of demand elasticity: If demand is perfectly elastic, firms are price takers and cannot influence price, which generally makes entry easier rather than deterring it.
Consider barriers to entry: The presence of barriers (such as high startup costs, legal restrictions, or control over key resources) makes entry more difficult and thus deters potential entrants.
Evaluate the relationship between market price and average total cost (ATC): If the market price is above ATC for all firms, new entrants can expect to make profits, which encourages entry rather than deters it.
Focus on cost advantages of existing firms: Significant cost advantages (like economies of scale, better technology, or access to cheaper inputs) allow existing firms to produce at lower costs than new entrants, making it harder for new firms to compete profitably and thus effectively deterring entry.
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