Dominant Firms, Barriers to Entry Capital and Antitrust Policy

The main idea of our paper comes from earlier industrial organi-zation literature that has shown that the threat of entry limits the price setting power of dominant \u85rms and stimulates the incumbents to undertake innovations. We provide a theoretical framework of the dynamics of competition where incumbents attempt to restrict or in-hibit competition through competition restricting investments such as advertisement, political lobbying, protection of innovations through patents, and creating excess capacity, etc. Depending on how other rms and the regulatory institutions respond to this type of invest-ment, complex dynamics may emerge. Since the e¤ectiveness of com-petition restricting investments depends on regulatory rules set and enforced by antitrust institutions, we show how an antitrust and com-petition policy can be designed that may prevent the build up of such a competition restricting capital, strengthening incentives for price and innovation competition.