chapter  10
Potential Competition and Entry Deterrence
Pages 22

It is a clear prediction of the simple structure-conduct-performance explanation of industrial organisation that the smaller the number of firms operating within a market the more likely it is that they will restrict competition within it. The restriction of competition may take the form of collusive pricing or market-sharing agreements, and may also extend to restricting entry into the market by new firms, for, without some form of barrier to new competition, market power is a short-run phenomenon only. Thus a barrier to entry can be part of the competitive strategy of firms already producing in a market (the incumbents). However, an entry barrier is not an unambiguous concept. It is possible in theory to distinguish between ‘natural’ or ‘innocent’ barriers, which occur independently of the conduct of the incumbent firms, and ‘strategic’ barriers which are the result of the conscious actions of incumbents. In practice however, the distinction between natural and strategic barriers is not so easily made, as we shall see below.