Strategic Behaviour of Incumbents – Rationality, Welfare and Competition Policy

The liberalisation of formerly regulated markets often leads to asymmetric market structures characterised by one or a few large incumbent firms retaining considerable market power and several smaller new entrants. These new competitors threaten the incumbents in at least two ways. On the one hand, they take market share away, reducing an incumbent’s share of the profit pie. On the other hand, new entrants often intensify competition, reducing the size of the profit pie. Against this background, it is not surprising that incumbent firms would like to impede market entry or at least reduce the competitive threat of entry. One option for dominant incumbents to reach this aim is to use some form of strategic behaviour aiming at discouraging entry or encouraging exit of rivals.