The Baltic Region

2016 Issue №4

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Socially efficient entry barriers?

DOI
10.5922/2079-8555-2016-4-3
Pages
26-38

Abstract

Stagnation of the Russian economy lends a new urgency to the question of whether reserves of competition incentives can be used to overcome the current negative economic tendencies. The lowering of entry barriers is traditionally considered a universal instrument of promoting competition. However, lower entry barriers can be mistakenly associated with bringing the market closer to the state of the so-called ‘perfect’ competition. The authors aim to show that the absence of entry barriers does not improve competition in certain markets. On the contrary, it may result in a decrease in social welfare. This is particularly true of capital-intensive goods, for instance, large diameter pipes for gas pipelines. Lack of proper competition in such sectors of the market necessitates entry barriers, for they help to achieve a separating equilibrium at the market. Since there are costs associated with creating a separating equilibrium, it is necessary to assess both costs and benefits of the pooling and separating equilibria.

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