ABSTRACT
So far in our discussion of monopoly and oligopoly it has been assumed that the existence of barriers to entry prevents the erosion of monopoly profits by new competitors in the long run. However, in practice not all monopolistic and oligopolistic industries are protected by such barriers, and where they exist they are not always completely insurmountable. This means that the likely reactions of potential entrants to an incumbent firm’s behaviour may have as much effect on its actions as the reactions of existing competitors. In this chapter, therefore, we consider in more detail the nature of entry barriers and how they might affect the behaviour of firms. We also consider how monopolistic firms behave in the absence of entry barriers on the basis of the recently developed theory of contestable markets.
