Question

Incumbents typically have a cost advantage as compared to new entrants because?

1) They have established relationships with suppliers
2) They have economies of scale
3) They have brand recognition
4) They have lower production costs

Answer 1

Incumbents often have a cost advantage due to established supplier relationships, economies of scale, brand recognition, and as a result, lower production costs, making it difficult for new entrants to compete on price.

Step-by-step explanation:

Incumbents typically have a cost advantage over new entrants for several reasons. First, they have established relationships with suppliers, which can lead to preferential pricing or more favorable terms due to long-term business dealings. Second, incumbents often benefit from economies of scale, which allows them to spread their fixed costs over a larger output, effectively reducing the cost per unit. Third, strong brand recognition means customers are more likely to continue purchasing from an incumbent due to familiarity and perceived reliability. Lastly, all of these factors contribute to the incumbents typically having lower production costs compared to new market entrants who have to invest in establishing these elements from scratch.

Answer 2

Incumbents typically have a cost advantage over new entrants due to economies of scale and established relationships with suppliers.Thus option 2) They have economies of scale is crrect answer.

Step-by-step explanation:

Economies of scale play a pivotal role in providing incumbents with a cost advantage over new entrants. This concept reflects how the average cost per unit decreases as production levels increase. Mathematically, average cost (AC) = Total cost (TC) / Quantity (Q). As the quantity produced (Q) increases, the average cost (AC) decreases due to the spreading of fixed costs over a larger output. This reduction in per-unit cost enables incumbents to offer competitive pricing and higher profitability.

Additionally, established relationships with suppliers contribute significantly to cost advantages. These relationships often allow incumbents to negotiate better prices, secure volume discounts, or access preferential terms due to their long-standing partnerships. For instance, securing a 10% discount on raw materials through such relationships directly impacts production costs, further enhancing the cost advantage over new entrants.

While brand recognition (Option 3) and lower production costs (Option 4) can be factors contributing to a competitive edge, economies of scale and advantageous supplier relationships stand out as the primary reasons for incumbents' cost superiority. These elements enable incumbents to maintain lower costs per unit, facilitating competitive pricing and sustained market dominance.