Economies of scale are a barrier to entry because:
A)New entrants are positioned at the top of their learning curve
B)New entrants are uncertain about their future costs which discourages then from making investments
C)New entrants face a risk of retaliation from the incumbents whose large scale of operation allows them to flood the market
D)New entrants face high unit costs either because they enter at sub-optimal scale,or they make a large-scale entry that initially operates with substantial excess capacity

Question

Quizplus · Accepted Answer

Economies of scale refer to the cost advantages that arise from producing at a larger scale. This means that as the size of the operation increases, the unit cost of production decreases. New entrants, however, face high unit costs because they either enter at a sub-optimal scale, which means they are not large enough to benefit from economies of scale, or they make a large-scale entry that initially operates with substantial excess capacity, which means they have to bear high fixed costs even though they are not producing at full capacity. This makes it more difficult for new entrants to compete effectively with incumbents who are already operating at a larger scale and enjoying cost advantages. Therefore, choice D is the best answer. A, B and C are not the main reasons why economies of scale are a barrier to entry.

Economies of Scale Are a Barrier to Entry Because