MGEC41H3 Lecture Notes - Lecture 6: Perfect Competition, Fixed Cost, Sunk Costs
24 Sep 2020
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Mgec lecture 6 entry and entry deterrence (week 6) Entry: new firms entering a market/industry: new start up/entrepreneur or, established firm in one market/industry entering a new different market/industry (ie. air canada offering a new route) Entry deterrence by existing firms (called incumbents) to reduce competition. Also incumbents forcing other firms already in the market out. Exit: existing firm leaves the industry: airline example, air canada stopping service on some routes due to covid19. Business stealing: new firm takes existing customer away from incumbent firms: no effect to the social welfare (if the industry has high fixed costs, can actually reduce social welfare) High sunk costs by incumbents can deter entrance for new firms. Incumbents pay and it is sunk so it"s irrelevant to their future decisions. If there was no sunk fixed cost, the entry and exit point will be the same. Difficult, expensive, prohibited: production level that competes with incumbents.
