Barriers to entry vs. competitive strategy

Abstract

This paper tries to expose how incumbents within an industry promote difficulties in order to impede new entrants. These are known as creating barriers to entry and have always been misunderstood by scholars of economics. The main reason for this can be found in the contrasts similar to “living off rents” as opposed to “living off profits” which makes industries inefficient. When a tribunal (in the case of Europe: Tribunal for the Defence of Free Competition) or Courts (in the case of the USA) have proven that a company, or merger, has cooperated in exercising market power; due to its supremacy, through whatever means, it seems appropriate to reduce this market power. The structure-Conduct-Performance paradigm provides us with theoretical tools to identify the exercise of this market power and an analysis of barriers to entry is the best method to categorize this behaviour. However, in the light of new research traditional barriers to entry, such as Industrial concentration or excess of capacity installed have been reconsidered. Industrial concentration is considered to be more an indicator of optimum plant size while installed capacity in an industry should be linked with sunk costs. This paper shows the evolution of the economic theory on these issues.