An overinvestment strategy is an entry-prevention strategy for an incumbent firm in which the incumbent monopolist overinvests in production capacity to make a credible threat to increase its output beyond the limit quantity (and thereby sell the goods at a price below the limit price) if any competitor enters the market.

Question

Quizplus · Accepted Answer

This statement accurately describes the overinvestment strategy. The incumbent firm invests in excess capacity in order to discourage potential competitors from entering the market by threatening to flood the market with its own supply and drive down prices.

An Overinvestment Strategy Is an Entry-Prevention Strategy for an Incumbent