Even in a market which is not perfectly competitive, it is possible for incumbent firms to behave in a competitive manner if the market is contestable.

Where a market is contestable, incumbent firms will find it harder to adopt a tactic of because firms will be unable to sustain setting price below cost to discourage entry.

Which one of the following is a reason why an incumbent firm might engage in product differentiation in a contestable market?

To create more of a barrier to entry and thus reduce the threat of entry

Increased product differentiation helps incumbent forms practice cross-subsidization

A greater portfolio of products, each of which is differentiated, allows incumbent firms to practice marginal cost pricing across all their products

Greater product differentiation makes it easier for potential entrants to enter and increase competition