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Ricardian or Monopoly Rents? The Perspective of Potential Entrants

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  • Joseph Shaanan

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    (Bryant University)

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    Abstract

    Tests of the efficiency and market power hypotheses have focused on incumbents’ profitability. The current study examines the issue from the perspective of potential entrants. A key premise of the paper, which follows from the efficiency hypothesis, is that incumbents’ Ricardian rents (resulting from efficiency) usually do not induce entry. However, incumbents’ monopoly rents should attract entry, ceteris paribus. The entry response to adjusted and unadjusted profitability measures is compared. The difference between the measures represents Ricardian rents, according to the efficiency hypothesis, and monopoly rents, according to the market power hypothesis. The results, generally, favor the market power hypothesis.

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    File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume32/V32N1P19_30.pdf
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    Bibliographic Info

    Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

    Volume (Year): 32 (2006)
    Issue (Month): 1 (Winter)
    Pages: 19-30

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    Handle: RePEc:eej:eeconj:v:32:y:2006:i:1:p:19-30

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    Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
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    Web page: http://www.ramapo.edu/eea/journal.html
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    1. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    2. Schmalensee, Richard, 1987. "Collusion versus Differential Efficiency: Testing Alternative Hypotheses," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(4), pages 399-425, June.
    3. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 443-59, March.
    4. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 32(4), pages 435-50, June.
    5. Gilbert, Richard J., 1989. "Mobility barriers and the value of incumbency," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 8, pages 475-535 Elsevier.
    6. Mancke, Richard B, 1974. "Causes of Interfirm Profitability Differences: A New Interpretation of the Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(2), pages 181-93, May.
    7. Joseph E. Harrington Jr., 1984. "Noncooperative Behavior by a Cartel as an Entry-Deterring Signal," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 426-433, Autumn.
    8. Masson, Robert T & Shaanan, Joseph, 1982. "Stochastic-Dynamic Limiting Pricing: An Empirical Test," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 413-22, August.
    9. Martin, Stephen, 1988. "Market Power and/or Efficiency?," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 331-35, May.
    10. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 981-96, July.
    11. Kamien, Morton I & Schwartz, Nancy L, 1971. "Limit Pricing and Uncertain Entry," Econometrica, Econometric Society, Econometric Society, vol. 39(3), pages 441-54, May.
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