Network Externalities and Friendly Neighbors: When Firms Choose to Invite Competition
Economic theory on the subject of barriers to entry focuses almost exclusively on firms working to preserve market power and economic profits. In this paper, we propose that under certain circumstances firms may instead choose to reduce barriers to entry as a profit-maximizing mechanism. We model these conditions and predict that in some industries, an increase in the number of participating firms will induce enough growth in the industry to allow existing firms to increase profit by enticing other firms to enter the market.
Using data on the National Football League, we demonstrate that firms (teams) do in fact engage in behavior to reduce barriers to entry for competitors and thereby increase their own profits. This model differs from the standard agglomeration models by proposing that firms deliberately lower fixed costs for their competitors as a rational act, instead of suggesting that fixed costs are incidentally reduced due to concentration of firms.