Why is the threat from new entrants considered significant in the context of market competition?

• A. The presence of new entrants guarantees monopoly power for existing firms.
• B. New entrants typically reduce consumer choice in the market.
• C. New entrants can increase competition, potentially driving down prices and profits for existing firms.
• D. New entrants always have higher costs than established firms, making them less competitive.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'threat of new entrants' in market competition, which refers to the possibility that new firms may enter an industry and increase competition.
2. Recognize that when new firms enter a market, they increase the number of competitors, which can lead to more options for consumers and greater pressure on existing firms.
3. Analyze how increased competition from new entrants can lead to lower prices, as firms compete to attract customers, which may reduce the profits of existing firms.
4. Note that the threat of new entrants limits the market power of existing firms because they must consider potential competition when setting prices and output levels.
5. Conclude that the significance of the threat from new entrants lies in its ability to increase competition, thereby preventing existing firms from exercising monopoly power and potentially benefiting consumers through lower prices and more choices.