The Role of Entry in Oligopoly

The literature on entry has become very extensive over the years.1 Although the question of entry-preventing behaviour was first raised by Kaldor,2 the main discussion arose out of the basic prediction of the model of monopolistic competition that firms would earn only normal profits in the long run, and that each firm would be operating with excess capacity (see p. 37). Harrod argued3 that firms would forgo some potential profit in the short run by setting a price lower than that which would maximise their profits in order to discourage new entrants into the industry. Subsequently, the discussion of the role of entry has largely evolved into an attempt to provide an answer to the question as to whether it is more profitable for a firm to maximise short-run profits in the knowledge that this will attract new entrants and hence erode the firm’s market share in the long run, or for a firm to deter entry by holding down prices in the short run in the expectation that it will be able to retain a substantial share of the market over time. These possibilities are illustrated in Figure 10.1.