Question 1

What is the term defined as the withdrawal of a product from a market?

Accepted Answer

The term "exit" is used to describe the withdrawal of a product from a market.

Question 2

What term best describes the paradox which says despite the conclusion that predatory pricing to deter entry appears irrational,many firms are commonly perceived as slashing prices to deter entry?

Accepted Answer

The Chain-store paradox describes the situation where, despite economic models suggesting that predatory pricing to deter entry is irrational (since sustaining low prices long enough to bankrupt competitors can be very costly and not always successful), many firms are still commonly perceived as engaging in such behavior to deter new entrants into the market. This paradox highlights the discrepancy between theoretical predictions and real-world business strategies.

Question 3

Which of the following generally accompanies firms that survive as market entrants?

Accepted Answer

A

Question 4

What type of entry exists if structural barriers are so high the incumbent need do nothing to deter entry?

Accepted Answer

Blockaded Entry refers to a situation where structural barriers are so high that potential entrants are effectively prevented from entering the market, without the incumbent having to take any additional actions to deter them. This can happen due to factors like high capital requirements, access to technology, or control over essential resources.

Question 5

How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?

Accepted Answer

Patents protect novel and non-obvious products or production processes by granting the inventor exclusive rights to use and sell the invention for a limited period of time, providing a legal barrier to entry for potential competitors.

Question 6

Which of the following methods is believed to be used by Brazilian cement makers to prevent entry into the market?

Accepted Answer

Limit pricing is a strategy where existing firms set prices low enough to deter new entrants from entering the market, as it makes it unprofitable for potential competitors.

Question 7

Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry?

Accepted Answer

DeBeers controls the majority of the world's diamond supply, creating a barrier to entry for competitors. This allows them to maintain a monopoly on the diamond industry.

Question 8

What term describes a market where a monopolist cannot raise price above long run average cost?

Accepted Answer

A market that is perfectly contestable is one where there are no barriers to entry or exit, meaning that new firms can easily enter the market to compete with existing firms. In such a market, a monopolist cannot raise prices above the long run average cost because they risk being undercut by new entrants who are able to produce at a lower cost. This makes the market highly competitive, resulting in efficient outcomes for consumers.

Question 9

Which of the following is not an exit barrier for firms in an industry?

Accepted Answer

Excess capacity is not an exit barrier as it does not create any obligation or commitment for the firm. Rather, it is an internal factor that hinders the firm from utilizing its resources efficiently. Sunk costs, labor agreements or raw material commitments, obligations to input suppliers, and government restrictions are all factors that create barriers to exit for firms in an industry.

Question 10

What term represents the conduct and performance of firms in the market after entry has occurred?

Accepted Answer

Postentry competition refers to the conduct and performance of firms in the market after entry has occurred. It includes the actions taken by existing firms to maintain their market share and the strategies adopted by new entrants to gain a foothold in the market.

Question 11

What was the cause of Walmart's exit from the German market?

Accepted Answer

The answer of What was the cause of Walmart's exit...

Question 12

What type of entry exists if (1)the incumbent can keep the entrant out by employing an entry-deterring strategy and (2)employing the entry-deterring strategy boosts the incumbent's profits?

Accepted Answer

Deterred Entry occurs when the incumbent can prevent the entrant from entering the market by using strategies that also increase the incumbent's profits.

Question 13

Which of the following is a method a monopolist firm might use to prevent entry into a market?

Accepted Answer

A monopolist firm may use all three methods to prevent entry into a market. 
Limit pricing involves setting a low price to deter new firms from entering the market as they will not be able to cover their costs. 
Predatory pricing involves setting prices below the cost to drive competitors out of business. 
Capacity expansion involves increasing production capacity to lower costs and make it difficult for new firms to compete.

Question 14

What type of firm is one that is already operating in a particular market?

Accepted Answer

An incumbent firm is one that is already operating in a particular market, meaning they have an established presence and are not a new entrant or follower. They may also be a market leader, but this is not always the case. An incumbent firm may face competition from other firms in the market. A monopolist, on the other hand, is a firm that is the sole provider of a product or service in the market.

Question 15

What situation occurs when a large incumbent sets a low price to drive smaller rivals from the market?

Accepted Answer

This situation describes predatory pricing, in which an established company sets a very low price for its products or services with the intention of driving smaller competitors out of the market. Once the smaller rivals are eliminated, the larger company can then increase its prices and regain its market power. This practice is illegal in many countries, as it can harm competition and consumers in the long run.

Question 16

What are the two types of barriers to entry?

Accepted Answer

The two types of barriers to entry are structural barriers and strategic barriers. Structural barriers are natural or inherent obstacles to entering a market, such as economies of scale, product differentiation, and capital requirements. Strategic barriers, on the other hand, are deliberately created obstacles to prevent new entrants from entering the market, such as predatory pricing, exclusive contracts, and advertising campaigns. Therefore, option C is the correct answer.

Question 17

What situation occurs if an incumbent firm with increasing marginal costs or limited capacity sets a price just below the entrants' marginal costs even though the incumbent may be unable to meet all market demand (or possibly may have to sacrifice its profits to do so)?

Accepted Answer

This situation is an example of strategic limit pricing, where the incumbent firm sets a low price to deter entry or limit the market share of the entrants. The incumbent firm may be willing to sacrifice some profits to prevent competitors from entering the market or gaining a substantial foothold in the market. This behavior is strategic because it can avoid the need for price competition in the future, and it may signal the entrants that the market is not profitable enough to justify their investment. This can be an effective strategy when the entrants have limited resources or face high fixed costs of entry. The other options do not fit this scenario as well. Contestable limit pricing implies the threat of entry is enough to discipline the incumbent's pricing behavior, which may not be the case here. Predatory pricing implies an intent to drive competitors out of the market, which may be unlikely if the incumbent has limited capacity. Quality pricing and capacity expansion are not relevant in this case as they do not involve pricing strategies to deter entry or limit market share.

Question 18

Which of the following is a potential risk of a brand umbrella?

Accepted Answer

If a new product under the brand umbrella fails, it may negatively impact the overall brand's image and reputation, leading to consumer disenchantment. This can be a potential risk associated with having a brand umbrella.

Question 19

Which of the following terms refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs?

Accepted Answer

Limit pricing is a strategy used by incumbent firms to deter new entrants into the market by setting prices low enough to make entry unattractive, but not so low as to constitute predatory pricing. This approach is aimed at maintaining market share and discouraging competition by making the market less appealing to potential new entrants.

Question 20

What type of entry exists if structural entry barriers are low,and either (1)entry-deterring strategies will be ineffective or (2)the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out?

Accepted Answer

Accommodated entry exists when the structural entry barriers are low, and either the entry-deterring strategies will be ineffective, or the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out. In such a situation, the incumbent may choose to accommodate the entrant rather than deter it. This could take the form of co-opting the entrant, forming a strategic alliance, or simply allowing the entrant to enter the market without any resistance.

Quiz 6: Entry and Exit