AN INDEX OF ENTRY BARRIERS AND ITS APPLICATION TO THE MARKET STRUCTURE PERFORMANCE RELATIONSHIP.

The present paper constructs an index of the overall level of entry barriers for each of the 71 Canadian three-digit manufacturing industries. This index, and its underlying methodology, should be more useful than any alternative empirical measure of overall entry barriers currently available. Some measure of the overall level of entry barriers is crucial to anti-trust investigators, as well as economists interested in the interaction between market structure and performance. This index of entry barriers is then employed to re-examine several issues current in the market structure-performance literature. Often economists expect a strong positive relationship between entry barriers and long-run average profit rates. However, there are several reasons why this relationship may not be detected in empirical investigations based on reported profit rates. An industry may record relatively high profit rates without entry barriers if its equity is understated due to the omission of intangible capital created by advertising or research and development. An industry with high entry barriers may be relatively unprofitable if the rents of many of the scarce factors have been capitalized. Similarly, high barriers and only modest profits will coincide if the benefits of monopoly power are reflected in inefficiency or non-monetary benefits rather than profits. Another factor preventing a strong positive relationship between entry barriers and profit rates is limit pricing.