Ricardian or Monopoly Rents? The Perspective of Potential Entrants

Abstract

Tests of the efficiency and market power hypotheses have focused on incumbents’ profitability. The current study examines the issue from the perspective of potential entrants. A key premise of the paper, which follows from the efficiency hypothesis, is that incumbents’ Ricardian rents (resulting from efficiency) usually do not induce entry. However, incumbents’ monopoly rents should attract entry, ceteris paribus. The entry response to adjusted and unadjusted profitability measures is compared. The difference between the measures represents Ricardian rents, according to the efficiency hypothesis, and monopoly rents, according to the market power hypothesis. The results, generally, favor the market power hypothesis.