Industry analysis substitute, government, difference, following, power

vagabond

The threat of entry by new competitors has which of the following effects?

A. Increases the likelihood that consumers will use substitute goods.
B. Increases the bargaining power of suppliers.
C. Places a limit on prices that can be charged and affects profitability.
D. Reduces the possibility of government regulation

Can someone explain the difference between A and C; I beleive that they are cause and effect
Thanks

lc26mizzou

Economics is not my strongest section, but;
A- Substitute goods are purchased when demand is more elastic, so when prices rise people will purchase the substitute product.(ex chicken for beef when beef prices rise)
Threat of entry by new competitors will keep prices low because high prices attract new competitors. Low prices----decreased likelihood of substitutes

C-Seems like it goes hand in hand with A, but not from a standpoint of substitutes. It limits prices charged in that you do not want to attract many new competitors. I assume that limits profitability.

Was C the right answer?

sgupta0827

I think this is a terrible question, are you getting these from investopedia?

The outcome will be different depending on what type of market it is, I don't think it will be the same for monopoly, perfect competition, oligopoly, and monopolistic competition.

dotamasta

cfagoal2 Wrote:
-------------------------------------------------------
> I think this is a terrible question, are you
> getting these from investopedia?
>
> The outcome will be different depending on what
> type of market it is, I don't think it will be the
> same for monopoly, perfect competition, oligopoly,
> and monopolistic competition.


LOL I like the investopedia comment. I bought a securities licensing exam book from them and returned it to them in a week. It was absolute garbage and every section had a reference to a web address on investopedia to get more info.

Monopoly-Barriers to entry are high which allows them to charge higher prices
Perfect competition-there are already many competitors so it is a moot point
Oligopoly-Few sellers with the opportunity to collude on price....cartels like OPEC, High barriers to entry
I think this can only apply to Monopolistic Competition. Low barriers to entry, maybe oligopoly

bluejazzy

Wouldn't be A because increased competition will drive prices lower, therefore consumers would choose this product instead of substitutes.

To give example. If there is only one gas station in town, the threat of another gas station will keep the prices low and limit profit. If this one gas station charges too much, it will prompt new entries to compete therefore driving down prices.

A sub would be something such as ethanol etc. C is right.