When profit-maximizing firms enter a competitive market, they have different economic incentives than the existing market participants. This is because these firms are not constrained by any of the sunk costs that exist in an industry and can take advantage of this difference to profit maximize. They do so by behaving asymmetrically with respect to their potential competitors in two ways:
1) not entering when it would yield a loss; and
2) pricing below incumbent rivals for some periods after entry. The purpose of this article is to discuss how profit-maximizing firms behave differently from other types of firms when entering a competitive market, as well as its implications on strategy formation for future entrants into the same market.
A profit-maximizing firm enters a competitive market when existing firms in that market have information related to it. This means the profit-maximizing firm will need more resources than if it were entering a noncompetitive market. The way this affects the firm’s profits is by shifting them up and down depending on how much competition there is, with the amount of competition being positively correlated with an increase in demand for resources while negatively correlated with an increase in demand for its product or service.
If another profit-maximizing firm enters the competitive market, they will have to make decisions as well about supply versus demand because they employ similar methods when determining their optimal output level (the point at which marginal cost equals marginal revenue). In other words, both firms act as price takers who are then subject to what economists call perfect competition: where every single participant in the market has no power to affect prices.
When entering this competitive environment, this profit-maximizing firm would have difficulty understanding how much of an impact their company will make on the range of outputs produced by existing firms so it becomes essential for them to use economic tools such as marginal cost pricing or demand curves.
The market for this profit-maximizing firm is a competitive environment because it can only sell what consumers want which they are the ones who dictate price. This profit-maximizing firms entry will not change any of these assumptions or outcomes in that all other existing participants will be influenced by their presence and if they choose to enter with an increase in production, then at least one participant must decrease theirs so there won’t be changes in output levels overall but instead there would a shift from some participants changing how much they produce while others don’t change anything.
+ it either enters through a low price strategy and then switches to perfect competition or
+ it chooses not to enter at all. However, if this profit-maximizing firm does decide to enter via a low pricing strategy they can’t use their knowledge about marginal cost pricing due to competing firms being aware that they’ll do so from prior experience. This means there’s more power given back up to the incumbent firms who now have free range over how much prices are set because new entrants won’t be able to compete by using a similar tactic without exposing themselves as profit maximizers. In addition, given the possibility of other profit-maximizing firms deciding to enter the market, profit-maximizing strategies are generally not consistent and aren’t considered successful.
The profitability of a firm in an oligopolistic market will depend on whether it uses price competition or quantity competition. If the enterprise can keep its competitors from knowing that they are profit maximizers then they may be able to use their knowledge about marginal cost pricing with some success but as soon as they’re exposed for being a profit maximizer this strategy becomes ineffective because competing enterprises will know how to respond and beat them at their own game. In addition, if other profit-maximizing entities decide to enter the same industry using similar strategies without exposing themselves there is more power given back up over setting prices due to new entrants having less.
