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Teaching notes for chapter 14

This chapter and the next close the "loop" implicit in the structure-conduct-performance paradigm. Whereas previous chapters take structure as exogenously determined, Chapters 14 and 15 look at the endogenous determination of market structure. Chapter 14 focuses on the role of entry costs. In particular, it introduces the distinction between exogenous and endogenous entry costs (a distinction that is absent from most other IO texts).

The public policy issue addressed in this chapter is that of the welfare effects of entry. An important strand of the economics literature on this topic has emphasized the fact that, in a world of second best, free entry may not be a good thing; in particular, free entry may lead to excessive entry. This literature overstresses the importance of the business-stealing effect (the externality between entrants and incumbents) and underemphasizes the importance of firm heterogeneity, namely the fact free entry may help replacing inefficient firms with more efficient ones. To compensate for this perceived bias, Chapter 14 introduces the discussion of firm heterogeneity and free entry, including the example of deregulation and entry in the U.S. telecoms industry. (The importance of firm heterogeneity is also underappreciated in the treatment of competitive markets, a fact that justifies the inclusion of Section 6.2. On telecoms deregulation, see also Chapter 5.)

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