key term - Potential Entrants

Definition

Potential entrants refer to firms or businesses that are not currently operating in a particular market or industry but have the capability and intention to enter and compete if certain conditions are met. They represent a source of potential competition that can influence the behavior and decision-making of incumbent firms in the long run.

5 Must Know Facts For Your Next Test

1. Potential entrants can exert a disciplining effect on incumbent firms, even if they do not actually enter the market, by threatening to compete and erode profits.
2. The threat of potential entry can influence the pricing and output decisions of incumbent firms, leading them to behave more competitively to deter new competitors.
3. Barriers to entry, such as high start-up costs or regulatory hurdles, can limit the number of potential entrants and reduce the competitive pressure on incumbent firms.
4. The presence of potential entrants can affect the long-run equilibrium of a market, as incumbent firms may adjust their strategies to maintain their market position.
5. Potential entrants may be more likely to enter a market if they perceive that the incumbent firms are earning economic profits or if the market is growing and offers opportunities for new players.

Review Questions

• Explain how the threat of potential entrants can influence the behavior of incumbent firms in a market.
  • The threat of potential entrants can have a disciplining effect on incumbent firms, even if the potential entrants do not actually enter the market. Incumbent firms may feel pressure to maintain competitive pricing, improve efficiency, and invest in innovation to deter potential competitors from entering the market and eroding their profits. This threat of potential competition can lead incumbent firms to behave more competitively and make decisions that benefit consumers, such as offering lower prices, higher quality, or greater product variety.
• Describe how barriers to entry can affect the number of potential entrants in a market and the level of competition.
  • Barriers to entry, such as high start-up costs, economies of scale, or government regulations, can limit the number of potential entrants in a market. When barriers to entry are high, it becomes more difficult for new firms to enter and challenge the incumbent firms. This can reduce the competitive pressure on incumbent firms, allowing them to maintain higher prices, lower quality, or less innovation. Conversely, when barriers to entry are low, the threat of potential competition from new entrants can compel incumbent firms to be more responsive to consumer needs and maintain a more competitive market environment.
• Analyze how the presence of potential entrants can influence the long-run equilibrium of a market.
  • The presence of potential entrants can affect the long-run equilibrium of a market by influencing the decisions and strategies of incumbent firms. Incumbent firms may adjust their pricing, output, and investment decisions to deter potential entry and maintain their market position. This can lead to a long-run equilibrium that is different from what would occur in the absence of the threat of potential competition. For example, incumbent firms may choose to maintain lower prices or higher quality to make it less attractive for new firms to enter the market, even if this results in lower short-term profits. The long-run equilibrium in such a market may feature more competitive outcomes for consumers, as incumbent firms are compelled to behave more efficiently and responsively to the potential threat of new entrants.

Related terms

Barriers to Entry:

Factors that make it difficult or costly for new firms to enter a market, such as high initial investment requirements, economies of scale, or government regulations.

Market Contestability: The degree to which a market is open to potential competition from new entrants, which can affect the pricing and behavior of incumbent firms.

Long-Run Equilibrium:

A state in which the market has reached a stable, long-term balance between supply and demand, with no incentive for new firms to enter or existing firms to exit.