Exit Barriers are Entry Barriers: The Durability of Capital as a Barrier to Entry

Abstract

We argue that the effectiveness of capital as an entry barrier depends critically on its durability and that this aspect of capital has been largely ignored. We examine strategic decisions with respect to capital durability in two models. In a broad range of cases an active policy with respect to durability and replacement of capital is necessary to maintain a position of market power. Such policies will result in capital that is too durable or too soon replaced or too well maintained relative to the cost minimizing solution (for a given time path of output).

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