When existing firms lose customers and profits due to entry of a new competitor, a
A)predatory-pricing externality occurs.
B)consumption externality occurs.
C)business-stealing externality occurs.
D)product-variety externality occurs.

Question

Quizplus · Accepted Answer

A business-stealing externality occurs when an existing firm loses customers and profits due to the entry of a new competitor. The new competitor essentially "steals" business from the existing firm, leading to a negative externality for the incumbent firm. Predatory pricing refers to a pricing strategy used by a dominant firm to drive out competitors by temporarily selling at a loss, while a consumption externality occurs when the consumption of a good or service by one individual affects the well-being of another individual. A product-variety externality occurs when the introduction of a new product by one firm affects the product offerings of other firms in the market.

When Existing Firms Lose Customers and Profits Due to Entry