A Level Economics AQA Practice Exam

What can a firm do to overcome barriers to entry in a competitive market?

1. Increase promotional spending

2. Enhance product differentiation

3. Form strategic alliances

4. Reduce pricing below cost

The correct answer is: Enhance product differentiation

Enhancing product differentiation is an effective strategy for a firm to overcome barriers to entry in a competitive market. By creating distinct characteristics or attributes in a product that set it apart from competitors, a firm can attract customers and establish a strong brand identity. This differentiation can be achieved through unique features, superior quality, better customer service, or innovative design, making the product more appealing to consumers. In a competitive market, established firms often benefit from brand loyalty and customer recognition. New entrants need to offer something unique to encourage consumers to switch from their preferred brands. By enhancing product differentiation, the firm can carve out a niche for itself, making it harder for competitors to win over their customers and thus lowering perceived barriers to market entry. While increasing promotional spending, forming strategic alliances, and reducing pricing can also influence market conditions, they may not directly address the fundamental issue of distinguishing a product in the eyes of consumers. For example, merely increasing promotional spending might not guarantee customer loyalty if the product lacks unique features. Similarly, strategic alliances can provide resources or access to markets but do not inherently improve product perception among customers. Reducing prices below cost can be unsustainable and may damage the firm's reputation or financial stability without ensuring long-term loyalty or value recognition.