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Ricardian or Monopoly Rents? The Perspective of Potential Entrants

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  • Joseph Shaanan

    () (Bryant University)

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.

Suggested Citation

  • Joseph Shaanan, 2006. "Ricardian or Monopoly Rents? The Perspective of Potential Entrants," Eastern Economic Journal, Eastern Economic Association, vol. 32(1), pages 19-30, Winter.
  • Handle: RePEc:eej:eeconj:v:32:y:2006:i:1:p:19-30
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume32/V32N1P19_30.pdf
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    References listed on IDEAS

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    1. 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 413-422, August.
    2. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    3. Gilbert, Richard J., 1989. "Mobility barriers and the value of incumbency," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 8, pages 475-535 Elsevier.
    4. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, vol. 32(4), pages 435-450, June.
    5. Kamien, Morton I & Schwartz, Nancy L, 1971. "Limit Pricing and Uncertain Entry," Econometrica, Econometric Society, vol. 39(3), pages 441-454, May.
    6. Schmalensee, Richard, 1987. "Collusion versus Differential Efficiency: Testing Alternative Hypotheses," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 399-425, June.
    7. Martin, Stephen, 1988. "Market Power and/or Efficiency?," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 331-335, May.
    8. 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, vol. 13(2), pages 418-438, Autumn.
    9. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, vol. 51(4), pages 981-996, July.
    10. Richard B. Mancke, 1974. "Causes of Interfirm Profitability Differences: A New Interpretation of the Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 181-193.
    11. 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.
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