Which of the following is the best test of whether potential entry is a strong or weak competitive force in a competitive market?

• A. Whether government regulations restrict advertising in the industry
• B. Whether new firms can enter the market and compete profitably
• C. Whether existing firms have high fixed costs
• D. Whether existing firms can easily lower prices to deter new entrants

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of potential entry as a competitive force. Potential entry refers to the possibility that new firms can enter the market and compete with existing firms, which influences the behavior and pricing strategies of current firms.
2. Step 2: Identify the key factor that determines the strength of potential entry. This is whether new firms can actually enter the market and compete profitably, meaning they can cover their costs and earn a reasonable return.
3. Step 3: Analyze why other options are less direct tests of potential entry. For example, government regulations on advertising or high fixed costs affect market conditions but do not directly measure the ability of new firms to enter and compete profitably.
4. Step 4: Recognize that the ability of existing firms to lower prices to deter entry is a strategic behavior, but it is a consequence of potential entry rather than a test of its strength.
5. Step 5: Conclude that the best test of whether potential entry is a strong or weak competitive force is to assess if new firms can enter the market and compete profitably, as this directly measures the threat of entry.