BPEA | 1987 No. 3: Microeconomics

Do Entry Conditions Vary across Markets?

1988, No. 3

THE NUMBER OF FIRMS in a market is a primary determinant of market concentration and performance. In the long run the number of firms is affected by the ease with which they can enter and exit. Many recent theoretical models of entry have emphasized that strategic behavior by incumbents may have an important bearing on the number of firms that enter the market. For instance, these models illustrate how the extent of post entry competition and opportunities for erecting strategic entry barriers might affect the likelihood that another firm will enter a market. In contrast to these strategic models, other models of the long-run number of firms emphasize that technological factors, such as economies of scale, determine entry. These theories minimize the importance of strategic behavior in the long run and instead emphasize that highly concentrated industries are simply ones for which few firms will fit given the degree of returns to scale.