Working Paper: NBER ID: w11645
Authors: Dennis W. Carlton
Abstract: This paper analyzes the concept of barriers to entry. It explains that the concept is a static one and explores the inadequacy of the concept in a world with sunk costs, adjustment costs and uncertainty. The static concept addresses the question of whether profits are excessive. The more interesting and relevant question is how fast entry or exit will erode profits or losses and how do the bounds that entry and exit place on price vary with uncertainty and sunk cost. Intuition based on the static concept of barrier to entry can be misleading in many industries.
Keywords: Barriers to entry; Market dynamics; Sunk costs; Uncertainty; Antitrust
JEL Codes: L1; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry barriers (L13) | market equilibrium prices (D41) |
| sunk costs and adjustment costs (D24) | timing of entry and exit decisions (D25) |
| uncertainty (D89) | expected timing and conditions of market entry or exit (C41) |
| perceived barriers (F55) | actual market behavior (D40) |
| adjustment costs (J30) | speed of market equilibrium adjustments (D53) |
| uncertainty (D89) | prolonged periods of excess profits (E32) |