Look Who Contests!

Competition policies focus on incumbent firm’s anticipatory behaviour to actual or potential entry threats leading to an erosion of monopoly power. Curiously, very little attention is paid to the potential entrant firm except that they are assumed to exist to provide competitive threats whenever suitable conditions for competition are fostered. An example is constructed to demonstrate that once the potential entrant in a game form is explicitly modeled, even in the limiting case of a perfectly contestable market one might witness monopoly pricing as part of a static Nash equilibrium. Consequently, the positive effects of a competition policy are not automatically guaranteed.