Technical Change, Barriers to Entry, and Market Structure

Abstract

ration. In seeking to explain the persistence of excess profits, economists typically invoke the concept of barriers to entry. But the standard textbook explanations, drawing on the work of Bain (1956), Sylos-Labini (1962), and Modigliani (1958), fail to confront the issue squarely. The question is inherently dynamic; the answers offered are typically static. The existence of barriers to entry cannot explain the persistence of excess profits, because barriers to entry, even if effective in the short run, tend to be eroded in the face of market growth and the diffusion of knowledge. To explain the persistence of excess profits it is necessary to examine the processes by which barriers to entry are continuously reproduced. One very important mechanism for the reproduction of entry barriers involves technological innovation. In the model developed here, existing firms enjoy a cost advantage over