Entry and Long-Term Trends in Industry Performance

• Author: Maury N. Harris
• DOI: 10.1177/0003603X7602100204
• Published date: 01 June 1976
• Date: 01 June 1976
• Subject Matter: Article

ENTRY

AN~D

LONG·

TERM

TRENDS

IN

INIDUSTRY

PERFORMANCE

by

MAURY

N.

HARRIS·

The argument

for

reliance on free markets in determining

the allocation of resources crucially depends upon the self-

regulatory mechanism of competition. Developments over

the

past

two decades in the theory of oligopoly, a quite preva-

lent market structure, have frequently focused upon

and

re-

fined the role of

barriers

to

entry

in stifling the de novo

entry

element of market self-regulation. The purpose of this note

is to cite evidence suggesting that, in spite of the presence

of alleged

entry

barriers,

entry

has exerted apro-competitive

impact in many, though

not

all, of the oligopolistic industries

which have been frequently sampled in previous studies re-

lating

profits to the condition of entry. The

primary

excep-

tions

are

industries with relatively high advertising

and

prod-

uct differentiation.

A

CRITIQUE

OF

EXISTING

THEORIES

AND

EVIDENCE

ABOUT

ENTRY

BARRIERS

Seminal works by Bain

and

Sylos-Labini led to the hy-

pothesis

that

the condition of

entry

influences

industry

price

and

profit performance.'

Later

contributions refined the

static

strategy

by which prices in industries with significant

entry

barriers

may

be

set

at

a"limit"

or

"stay-out" level

where

entry

is forestalled

and

greater

than

normal estab-

lished firm profits

are

earned." More recently, dynamic

models have been developed wherein aleading firm maximizes

•

Federal

Reserve

Bank

of New York.

AUTHOR'S

NOTE:

This article is

part

of my completed dissertation

at

Columbia University. I wish to express thanks to Professors Donald

Dewey

and

William Vickrey for their helpful comments.

1See Bain (1956)

and

Sylos-Labini (1962).

1I

For

example, see Dewey (1969)

and

Needham (1969).

295

296

THE

ANTITRUST

BULLETIN

the

present

value of profits

through

pricing to regulate the

rate

of entry."

The existing models may be criticized because they often

ignore

important

problems of oligopolistic coordination, fre-

quently assume established firms

react

to

entry

in a possibly

irrational

fashion by marketing

their

pre-entry

output, and

depend on the questionable presence of effective

entry

bar-

riers.

Failure

to coordinate price

and

output

decisions of

leading firms would mean

that

long-run prices

and

profits

may

settle below the level predicted by

entry

barrier

theories

either because prices

are

set too high and price-eroding

entry

is

attracted

or

because

intra-industry

competition keeps

profits below the level necessary to stall entry.

If

leading

firms' reactions to

entry

run

the gamut from price

wars

to

accommodation

via

output

cuts from

pre-entry

levels, then

knowledge of the existence of

entry

barriers

does

not

tell us

where limit profits will be unless we also know the precise

reaction to entry." Finally, the

very

concept of an

entry

bar-

rier

may be challenged on grounds

that

established domestic

or foreign enterprises can circumvent alleged capital require-

ments, scale economy, and

product

differentiation

barriers

if

profits

are

sufficiently enticing,"

The evidence on the influence of

entry

barriers

on profits

has not been conclusive. Mann

has

reported

that,

among a

sample of concentrated industries, long-term (1950-1966) lead-

ing firm

after-tax

rates

of

return

on equity were significantly

higher only in industries classified as having

"very

high"

overall

entry

barriers

but not in industries with

"substantial"

3Some representative works are Pashigian (1969)

and

Gaskins

(1971).

• Given

entry

barriers, the "stay-out" price is lower if

entrants

perceive the dominant firms'

entry

reaction to be one of

output

cuts,

as suggested by Wenders (1971),

and

relatively higher if

entrants

anticipate aprice war with leading firms increasing

their

output.

s McGee (1971) implies

that

the presence of established firms who

profitably operate under conditions of product differentiation

and

high capital requirements suggests

that

potential

entrants

might have

a reasonable probability of success following a gestation or learning

period.