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Dominant Firms, Barriers to Entry Capital and Entry Dynamics

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  • Willi Semmler
  • Mika Kato

    ()
    (Department of Economics Howard University)

Abstract

Recent literature in Industrial Organization has shown that the threat of entry limits the price setting power of dominant firms and stimulates the incumbents to increase innovations ---both leading to welfare improvements. On the other hand dominant firms as incumbents strive to build up entry preventing capital. In such an environment of heterogeneous firms, we study the dynamics of competition as suggested in an earlier paper by Brock (1983). When dominant firms face a threat of the competitive fringe’s entry in the industry they, therefore, will have an incentive to prevent it. Investing into barriers to entry capital through engaging in production activities with increasing returns and high adjustment cost of investment as well as through advertising, lobbying and patents the dominant firm can create thresholds above which fringe firms cannot induce price competition and stimulate innovations. The dominant firms thus face two types of investment: Entry-deterring investment and investment in physical capital for production activities. Depending on how the competitive fringe responds to the first type of investment, complex dynamics, multiple steady states and thresholds, separating different domains of attraction, may emerge. Since the effectiveness of entry-deterring investment depends in part on regulatory rules set and enforced by antitrust institutions, we show how an antitrust and competition policy can be designed that may prevent the build up of entry preventing capital strengthening incentives for price competition and innovations

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 194.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:194

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Keywords: entry-deterring investment;

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  1. Audretsch, David B. & Baumol, William J. & Burke, Andrew E., 2001. "Competition policy in dynamic markets," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 613-634, April.
  2. Brock, W A & Dechert, W D, 1985. "Dynamic Ramsey Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 569-91, October.
  3. Zhang, Wenlang & Semmler, Willi, 2005. "Monetary Policy Rules Under Uncertainty: Empirical Evidence, Adaptive Learning, And Robust Control," Macroeconomic Dynamics, Cambridge University Press, vol. 9(05), pages 651-681, November.
  4. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
  5. Grune, Lars & Semmler, Willi, 2004. "Using dynamic programming with adaptive grid scheme for optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2427-2456, December.
  6. Dechert, W. Davis & Nishimura, Kazuo, 1983. "A complete characterization of optimal growth paths in an aggregated model with a non-concave production function," Journal of Economic Theory, Elsevier, vol. 31(2), pages 332-354, December.
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