incumbent firm

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A firm which is already in position in a market. In a contestable market, where the goods produced by different firms are homogeneous and there are no sunk costs, there is complete symmetry between an incumbent firm and would-be entrants. If goods can vary in quality, so that reputation matters, and if there are any sunk costs, the incumbent is in a stronger competitive position than potential entrants: the incumbent has established market contacts, and has already incurred the sunk costs. An incumbent will have a further competitive advantage if cost savings come from learning by doing: an existing firm has a start on any new entrant in the experience from which cost reductions are derived.

Subjects: Economics.

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