Can the Threat of Entry Reduce Competition?

This paper is the \u85rst to provide a general context whereby potential entry can permanently reduce the intensity of competition in a market. All previ-ous results found that potential entry would lead to lower prices and greater competition. Examining markets where entry occurs by the acquisition of ac-cess rights from existing incumbents, we demonstrate that, when competitive choices are strategic complements, a more e ¢ cient entrant may be unable to acquire those rights from a less e ¢ cient incumbent due to the accommodat-ing behavior of e ¢ cient incumbents. Similarly, such accommodating behavior may deter e ¢ cient investment by an incumbent or mergers that would gen-erate social welfare improvements. These results have implications as to how economists view potential entry and its bene\u85ts