Professor Bain and Barriers to New Competition

Abstract

THE importance of actual or potential entry as a determinant of industry performance occupies a central role in neoclassical price theory. In the long run if there is free and easy entry prices will be forced to the level of average costs including necessary profits; if there is no product differentiation by rival sellers the price-output equilibrium will be brought to the low point of the long run average cost curve. If there can be no entry, the industry will either be a monopoly with the highest profitable price or an oligopoly with an indeterminate price. More than likely, however, oligopoly price will tend toward the monopoly level. In Barriers to New Competition, third in a Harvard University series on competition and monopoly in American industry, Professor Bain has attempted to extend neoclassical analysis of entry and recast its role and influence in industrial markets characterized by fewness of sellers. Reduced to its essentials, Bain's hypothesis is that the greater the structural barriers to competition from new sellers, the farther will industry performance be from the 'competitive optimum'. After setting a closely woven theoretical fabric extended from, but still fashioned by orthodox price theory, the author examines factors inhibiting new or potential entry in American industrial markets with often different and varied structural attributes. Empirical evidence of the significance and extent to which these attributes constitute entry barriers is then collected from twenty manufacturing industries. A ranking of these industries is made according to Bain's assessment of the height of entry barriers. Finally predictions as to likely performance of each industry are made and tested against their actual records. Bain's theory, set forth in detail in the first chapter, is that the underlying structural barriers to entry economies of scale, product differentiation, and absolute cost advantages -determine the advantages of established firms over potential entrants. The extent of these governs the degree to which the established sellers are able to maintain their price persistently above the competitive level without