Answer :
Incumbents typically have a cost advantage over new entrants because:b.) Incumbents have greater fixed costs but lower variables relative to new entrants typically.
Incumbents often have a cost advantage over new entrants due to several factors. One of the reasons is that incumbents tend to have greater fixed costs but lower variable costs compared to new entrants. Fixed costs are expenses that do not change regardless of the level of production or sales, such as infrastructure, equipment, and research and development. These costs are spread over a larger customer base for incumbents, allowing them to benefit from economies of scale. On the other hand, new entrants typically have to start from scratch, incurring high initial fixed costs without the advantage of spreading them across a large customer base. This cost structure can make it challenging for new entrants to compete on price and achieve profitability.
Additionally, incumbents often have established relationships and deeper connections with government and regulatory bodies (a). These connections can provide incumbents with favorable treatment, such as regulatory advantages, subsidies, or access to resources, which can act as a barrier to entry for new competitors.
Furthermore, incumbent market shares lead to greater economies of scale (c). As incumbents capture a larger market share, they can achieve economies of scale by producing in larger volumes, which results in lower average costs per unit. This cost advantage makes it difficult for new entrants to match the pricing and cost efficiency of incumbents.
While incumbents may have a technological edge compared to new entrants (d) in some cases, it is not a universal advantage. Technological advancements can disrupt industries and level the playing field for new entrants. Moreover, new entrants often have the opportunity to adopt the latest technologies without the burden of legacy systems or outdated infrastructure, enabling them to compete effectively.
In summary, incumbents typically have a cost advantage over new entrants due to their greater fixed costs but lower variable costs, deeper connections to government and regulatory bodies, and the ability to achieve economies of scale. These factors collectively create barriers to entry and make it challenging for new competitors to enter the market.
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Final answer:
Incumbents have a cost advantage over new entrants largely due to economies of scale, as well as established relationships, access to capital, and customer loyalty.
Explanation:
Incumbents typically have a cost advantage as compared to new entrants because incumbent market shares lead to greater economies of scale. Incumbents benefit from increased efficiency of production as the number of goods being produced increases. This scales down the unit cost of production, making operations more cost-effective. Additionally, incumbents often have established relationships with suppliers, better access to capital, and a strong customer base, all of which contribute to an environment where they can outperform new entrants that lack these advantages.