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

Question

Quizplus · Accepted Answer

All of the above options can make the threat of sharply increasing production credible, as they limit the existing firm's flexibility to reduce production in the future. By signing long-term sales contracts or purchase contracts, the firm commits to a certain level of output or input purchase, which can make it difficult to adjust production levels. Similarly, building a very large factory shows a strong intent to produce large amounts of output, which can intimidate potential entrants.

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