Economies of scale are a barrier to entry because
A)new entrants do not know where they are positioned on their learning curve.
B)new entrants do not yet understand the scale economies so they cannot precisely determine their selling price.
C)new entrants face a risk of price retaliation from the incumbents which could occur immediately on a large scale.
D)new entrants face the cost and risk of creating large scale capacity to start with or a severe cost disadvantage if they enter on a smaller scale.

Question

Quizplus · Accepted Answer

Economies of scale refer to the cost advantages that firms achieve as they increase production. Larger firms will be able to produce and sell goods or services at a lower cost per unit than small firms. Therefore, new entrants face the challenge of either creating a large scale capacity from the outset (which can be costly and risky) or entering the market on a smaller scale, which would put them at a disadvantage compared to incumbents who have already achieved economies of scale. This cost disadvantage can be a significant barrier to entry. Therefore, option D is the correct answer. The other options are not relevant to the concept of economies of scale being a barrier to entry.

Economies of Scale Are a Barrier to Entry Because