The key development in this chapter is that we’ve shifted our focus from the short run to the long run. This yields a more organic understanding of market structure. In the short run, your competitive landscape consists of a fixed number of rivals. But in the long run, new rivals can enter and disrupt your market. As they do so, they’ll change the structure of competition, and shift market power. But incumbent businesses don’t passively watch as these changes play out. They’re also strategic actors, using the tools at their disposal to impose barriers to entry and stifle competition. Likewise, brash new entrants like Tesla use these same insights to try to overcome barriers to entry. Your competitive landscape evolves as this strategic battle ebbs and flows.
When savvy executives have both the means to deter competitors and the incentive to do so, perhaps it’s no surprise that we see most markets are imperfectly competitive, and most businesses manage to retain some degree of market power. This dynamic highlights a central tension in markets. Consumers’ best interests are served by vigorous competition in which new businesses enter and compete with incumbents, driving prices lower. Those vibrant newcomers drive inefficient incumbents out of the market, and provide a constant source of renewal. But incumbent businesses want to protect their economic profits, and so they try to deter entry and lessen competition. The tension here is that markets work most effectively when there’s vibrant competition, but businesses will do all they can to throttle that competition.
That’s why there’s often fierce debate about what “free markets” really mean. Does it mean that the government should stay out of the way and let companies create large barriers to entry? Or should the government actively prevent companies from getting too big and powerful, so that more businesses can enter the market? This tension highlights the distinction between pro-market policies, which ensure consumers enjoy the benefits of robust competition in the market, and pro-business policies, which help existing businesses, often at the cost of destroying opportunities for potential new entrants.