A Welfare Analysis of Barriers to Entry

Abstract

It is widely believed that welfare would be improved by encouraging in circumstances where to entry (in the sense of Bain) exist. Two models are developed herein which demonstrate that this view is incautious. Economies of scale and product differentiation are both held to be barriers to in the Bain scheme of analysis. I show that there are plausible parameter configurations for both economies of scale and goodwill (which is a variant of product differentiation) under which welfare would be improved by increasing, rather than decreasing, the protection of incumbents from the competition of entrants. Greater attention to detail in the analysis of industry circumstances and greater caution in reaching obvious welfare conclusions are needed.