When incumbent firms lose customers and profits due to entry of a new competitor,what type of externality occurs

Question

Quizplus · Accepted Answer

When a new competitor enters the market and takes away customers and profits from existing firms, it is known as a business-stealing externality. This is because the new entrant is "stealing" customers and profits from existing firms, without compensating them for the loss. Predatory pricing externality and production externality are not relevant in this context, and product-variety externality refers to a different type of externality where the entry of a new competitor may lead to greater product variety in the market.

When Incumbent Firms Lose Customers and Profits Due to Entry