On the Effects of Entry

The problem of entry receives a great deal of attention in presentday Industrial Economics. The main question typically asked in this connection, ever since the work of Bain and Sylos-Labini, is what the best strategies are for oligopolists facing the threat of entry into their industry, that is, the implications of potential entry on their optimal policies regarding pricing, investment, R & D, advertising and so on. Were entry to occur, conventional wisdom says, the effects woulod be unambiguous : profits per firm, and perhaps also outputs per firm would fall, while the industry as a whole becomes "more competitive" in some sense, in particular expanding output. These effects are commonly taken for granted in discussions of entry, as obvious truths or, at best, as underlying assumptions. The natural question arises of whether this deep-rooted piece of conventional wisdom is in fact correct for the general case, as the behaviour of oligopoly is, alas, complex enough to keep many surprises in store.