Strategic Competition and the Persistence of Dominant Firms: a Survey

In the struggle to create, maintain and expand favourable market positions, firms’ actions are intended not only to affect the current conduct of rivals directly, but also to have an indirect effect by altering market structure in a way which constrains the rival’s subsequent actions. In this dynamic process, market strategies or conduct (the control variables) interact with market structure (the state variable); and current conduct can become embedded in future market structure through strategic investments made by firms to bar entry and reduce intra-industry mobility. (For an analysis of this view of industry dynamics, see Jacquemin, 1972; Caves, 1976, Part I; Caves and Porter, 1977; Spence 1981a, p. 51; and Stiglitz, 1981, p. 187). Of course, not all investments made by firms have the intended effect on market structure, and the purpose of this survey is to consider a recent body of literature which has devoted itself to precisely this point.1 This work is of interest because of the new light it has shed on the combined structural and strategic origin of market power; that is, on the hoary question of the persistence and profitability of dominant firms (compare Posner, 1972, p. 130 with Williamson, 1975, p. 218 for contributions to this old debate). The literature seems to have coalesced around two basic types of model.