A firm that is threatened by the potential entry of competitors into a market builds excess production capacity. This is an example of
A) a prisoners' dilemma.
B) collusion.
C) a credible threat.
D) tit-for-tat.

Question

Quizplus · Accepted Answer

Building excess production capacity can serve as a credible threat to potential entrants by signaling that the firm is prepared to lower prices or flood the market if new competitors enter, thereby deterring entry.

A Firm That Is Threatened by the Potential Entry of Competitors