Skip to main content

Why do firms oppose entry-deterring policies? Environmental regulation and entry deterrence

  • Ana Espínola-Arredondo (a1) and Félix Muñoz-García (a2)

This paper investigates the design of environmental regulation under different regimes: flexible and inflexible policies. We analyze under which settings strict emission fees can be used as an entry-deterring tool, and become socially optimal. Furthermore, we demonstrate that the incentives of the social planner and the incumbent firm are aligned regarding policy regimes ifentry can be easily deterred by setting a stringent regulation. Their incentives, however, can bemisaligned when entry becomes more costly to deter, leading the incumbent to actually preferenvironmental policies that attract entry.

Hide All
Bain, J. (1956), Barriers to New Competition, Cambridge, MA: Harvard University Press.
Brock, W. and Evans, D. (1985), ‘The economics of regulatory tiering’, RAND Journal of Economics 16(3): 398409.
Buchanan, J.M. (1969), ‘External diseconomies, corrective taxes and market structure’, American Economic Review 59: 174177.
Dean, T. and Brown, R. (1995), ‘Pollution regulation as a barrier to new firm entry: initial evidence and implications for further research’, Academy of Management Journal 38(1): 288303.
Dean, T., Brown, R., and Stango, V. (2000), ‘Environmental regulation as a barrier to the formation of small manufacturing establishments: a longitudinal examination’, Journal of Environmental Economics and Management 40(1): 5675.
Dixit, A. (1980), ‘The role of investment in entry-deterrence’, Economic Journal 90: 95106.
EPA (Environmental Protection Agency) (2001), ‘The United States experience with economic incentives for protecting the environment’, National Center for Environmental Economics, Washington, DC.
Espinola-Arredondo, A. and Munoz-Garcia, F. (2013), ‘When does environmental regulation facilitate entry-deterring practices’, Journal of Environmental Economics and Management 65(1): 133152.
Farzin, Y.H. (2003), ‘The effects of emission standards on industry’, Journal of Regulatory Economics 24: 315327.
Fudenberg, D. and Tirole, J. (1984), ‘The fat-cat effect, the puppy-dog ploy, and the lean and hungry look’, American Economic Review 74(2): 361366.
Ghosh, A. and Morita, H. (2007), ‘Free entry and social efficiency under vertical oligopoly’, RAND Journal of Economics 38(2): 541554.
Gilbert, R. and Vives, X. (1986), ‘Entry deterrence and the free-rider problem’, Review of Economic Studies 172: 7183.
Helland, E. and Matsuno, M. (2003), ‘Pollution abatement as a barrier to entry’, Journal of Regulatory Economics 24(2): 243259.
Ko, I., Lapan, H.E., and Sandler, T. (1992), ‘Controlling stock externalities: flexible versus inflexible pigouvian corrections’, European Economic Review 36: 12631276.
Kovenoch, D. and Roy, S. (2005), ‘Free-riding in non-cooperative entry deterrence with differentiated products’, Southern Economic Journal 72: 119137.
Kuhn, K. and Vives, X. (1999), ‘Excess entry, vertical integration, and welfare’, RAND Journal of Economics 30(4): 575603.
Mankiw, G. and Whinston, M. (1986), ‘Free entry and social inefficiency’, RAND Journal of Economics 17(1): 4858.
Monty, R.L. (1991), ‘Beyond environmental compliance: business strategies for competitive advantage’, Environmental Finance 11(1): 311.
OECD (2006), ‘Environmental regulation and competition’, OECD Competition Policy Roundtables, Directorate for Financial and Enterprise Affairs, Competition Committee Paris.
Porter, M.E. (1991), ‘America's green strategy’, Scientific American 264(4): 168.
Porter, M.E. and van der Linde, C. (1995a), ‘Green and competitive: breaking the stalemate’, Harvard Business Review, September–October issue.
Porter, M.E. and van der Linde, C. (1995b), ‘Toward a new conception of the environment–competitiveness relationship’, Journal of Economic Perspectives 9(4): 97118.
Ryan, S. (2012), ‘The costs of environmental regulation in a concentrated industry’, Econometrica 80(3): 10191061.
Schoonbeek, L. and de Vries, F.P. (2009), ‘Environmental taxes and industry monopolization’, Journal of Regulatory Economics 36: 94106.
Spence, M. (1977), ‘Entry, capacity, investment and oligopolistic pricing’, Bell Journal of Economics 10: 119.
Stavins, R. (2005), ‘The effects of vintage-differentiation environmental regulation’, Discussion Paper, Resources for the Future, Washington, DC.
Sylos-Labini, P. (1962), Oligopoly and Technical Progress, Cambridge, MA: Harvard University Press.
Ungson, G., James, C., and Spicer, B. (1985), ‘The effects of government regulatory agencies on organizations in high technology and woods products industries’, Academy of Management Journal 28(2): 426445.
Waldman, M. (1987), ‘Noncooperative entry deterrence, uncertainty and the free-rider problem’, Review of Economic Studies 54: 301–10.
Ware, R. (1984), ‘Sunk costs and strategic commitment: a proposed three-stage equilibrium’, The Economic Journal 94: 370378.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Environment and Development Economics
  • ISSN: 1355-770X
  • EISSN: 1469-4395
  • URL: /core/journals/environment-and-development-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 2
Total number of PDF views: 39 *
Loading metrics...

Abstract views

Total abstract views: 253 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 19th March 2018. This data will be updated every 24 hours.