THE STARFISH EFFECT - CAN MARKET ENTRY BY ONE FIRM ENCOURAGE FURTHER ENTRY BY OTHERS

This paper examines the impact of entry decisions into oligopolistic m arkets upon the entry and exit decisions of rival producers. When lear ning economies are important, entry by one firm may paradoxically make entry more attractive to others by weakening the ability of a dominan t incumbent to produce at low cost. The likelihood of this outcome dep ends upon the extent to which variable costs of production decline as output increases, and is enhanced by scope economies in the presence o f multi-market contact, as well as by the degree of cost asymmetry bet ween firms. It is suggested that entry-inducing entry may actually hav e occurred in part of the market for large civilian passenger aircraft . Whether or not this is so, a more general conclusion is robust: in i ndustries where scale and scope effects are large, the impact of entry is not just upon competition but on costs, and these effects work in opposite directions to influence the entry decisions of other firms.