La Tortilla is the only producer of tortillas in Santa Teresa. The firm produces 10,000 tortillas each day and has the capacity to increase production to 100,000 tortillas each day. La Tortilla has made a large profit for years, but no other firm has chosen to compete in the Santa Teresa tortilla market. La Tortilla has been able to deter entry because if other firms were to enter the market it would greatly step-up production and reduce price.
A) La Tortilla's behavior is inconsistent with economic theory.
B) La Tortilla has been successful because of its credible threat.
C) La Tortilla behaves like a Stackelberg firm.
D) La Tortilla must have other barriers to entry to protect its monopoly power.

Question

Quizplus · Accepted Answer

La Tortilla's credible threat to increase production and reduce price is a deterrent to potential entrants, making it a successful monopolist. This behavior is consistent with economic theory, and there is no evidence of other barriers to entry. However, La Tortilla does exhibit similar behavior to a Stackelberg leader in a duopoly market, where the leader sets output and the follower reacts.

La Tortilla Is the Only Producer of Tortillas in Santa