Economies of scale work as a barrier to entry because of its implication of profit concentration and the randomness of an agreement between incumbents to maintain the market share.
In this case, the barrier to entry turns from an old theoretical model to non-cooperative games, such as a limit pricing theory to the new theoretical framework to be enforced in economics.
At present, industrial concentration is no longer considered a barrier to entry. Strictly speaking, the production percentage concentred by one or five firms at the same industry is not market power unquestioned.
The use of capacity to expel competitors into an industry is the oldest barrier to entry; the idea was introduced by Edward Chamberlin into his thesis defended in 1927, but not in this way.
In fact, excess of capacity works as barrier to entry if rivals believe the threats launched by incumbents.
Since the 1970's, several authors worked on disconfirming excess of capacity as a barrier to entry. Most of them can be included within the Chicago School framework.
The point is when excess capacity does not lead to creation of a credible threat; it may still act as a barrier to entry by shifting the risk-return perceptions of potential entrants enough to redirect the potential entrants' investments into other industries.
As a conclusion, according to the light shed on the new research, the excess capacity doesn't work as a barrier to entry in the long run, because it is expensive, unless economies of large scale are being analyzed under the lens of sunk cost.
1710], and this is precisely the way it works as a barrier to entry because when advertising creates brand loyalty, followed by: 'Established firms are then able to charge high prices and earn significant profits without facing entry' [Bagwell, 2007, p.
It was Richard Schmalensee who explained how advertising works as a barrier to entry in the seventies.