Journal of Economic Perspectives: Vol. 3 No. 3 (Summer 1989)


Quick Tools:

Print Article Summary
Export Citation
Sign up for Email Alerts Follow us on Twitter


JEP - All Issues

The Role of Potential Competition in Industrial Organization

Article Citation

Gilbert, Richard J. 1989. "The Role of Potential Competition in Industrial Organization." Journal of Economic Perspectives, 3(3): 107-127.

DOI: 10.1257/jep.3.3.107


Potential competition is important as a mechanism to control market power. I assess the strengths and limitations of alternative theories of potential competition by examining the available theoretical, empirical and institutional knowledge. I consider four major schools of thought: the traditional model of limit pricing, dynamic limit pricing, the theory of contestable markets, and the market efficiency model. Traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult. Dynamic limit pricing is similar, but emphasizes that markets can only be temporarily protected from entry. Contestability theory, in its pure form, asserts that potential competition is as effective as actual competition in controlling market performance. The efficient markets hypothesis, broadly interpreted, states that markets are workably competitive and that the market structure reflects differential efficiency, not strategic behavior.

Article Full-Text Access

Full-text Article (Complimentary)


Gilbert, Richard J. (U CA, Berkeley)

JEL Classifications

611: Market Structure: Industrial Organization and Corporate Strategy


View Comments on This Article (0) | Login to post a comment

Journal of Economic Perspectives

Quick Tools:

Sign up for Email Alerts

Follow us on Twitter

Subscription Information
(Institutional Administrator Access)


JEP - All Issues

Virtual Field Journals

AEA Member Login:

AEAweb | AEA Journals | Contact Us