A Level Economics AQA Practice Exam

What characterizes hit and run competition?

1. Long-term commitment to a market

2. High costs that deter entry

3. Immediate exit following a decline in profits

4. Entry and exit in response to fluctuating profits

The correct answer is: Entry and exit in response to fluctuating profits

Hit and run competition is characterized by firms entering a market to take advantage of short-term profit opportunities and then exiting quickly if profits decline or if the market conditions become unfavorable. This behavior typically occurs in markets where there are low barriers to entry and exit, allowing firms to easily respond to changes in profitability. In this context, firms may quickly enter a market when they perceive that the prices are high and likely to yield immediate profits. If market conditions change—perhaps due to increased competition, falling prices, or rising costs—these firms will exit almost as swiftly as they entered, hence the term "hit and run." This fluid movement reflects a proactive approach where firms capitalize on transient opportunities rather than seeking long-term investments in the market. Understanding hit and run competition is essential because it highlights how market dynamics can be influenced by the behaviors of firms that are agile and responsive to profit signals rather than committed to sustained competition.