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. This may be a credible threat if:
A) production exhibits economies of scale.
B) production exhibits diseconomies of scale.
C) production costs may fall due to learning-by-doing.
D) A and C are correct.
E) B and C are correct.

Question

Quizplus · Accepted Answer

A credible threat to increase production to deter entry is more plausible if the existing firm can exploit economies of scale and experience lower costs through learning-by-doing, making it harder for the new entrant to compete.

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