Can reduced entry barriers worsen market performance? A model of employee entry

The fundamental contribution of the paper is to contest the view that reducing barriers to entry cannot retard market performance when firm rivalry is productive. In a model of employee entry, we demonstrate that a reduction in barriers to entry causes no fall in industry price when incumbents are able to buy-off potential entry through higher wages. Over the longer term, the analysis illustrates that reductions in barriers to entry can cause industry price to be greater than if entry barriers had persisted at their initial level. Correspondingly, the model indicates that investment in endogenous barriers to entry and wage ceilings on executive salaries may enhance market performance. (C) 2001 Elsevier Science B.V. All rights reserved.