Background
An incumbent firm is a company currently active and operating within a particular market.
Historical Context
The concept of the incumbent firm is essential in understanding market structures and competition dynamics. Historically, incumbent firms have had a significant influence over market conditions due to their established presence and experience within the sector.
Definitions and Concepts
An incumbent firm refers to a business that is already established in a particular market. In a contestable market, where goods produced by different firms are considered homogeneous, and there are no sunk costs, there is essentially complete symmetry between an incumbent firm and potential new entrants.
However, variations in product quality, the presence of sunk costs, and advantages like learning by doing often place incumbent firms in a stronger competitive position.
Major Analytical Frameworks
Classical Economics
In classical economic theory, the presence of incumbent firms is less emphasized, as markets are often assumed to be in perfect competition.
Neoclassical Economics
Neoclassical economics views the incumbent firm in terms of competition and efficiency. Sunk costs and economies of scale provide incumbents with competitive advantages.
Keynesian Economics
Keynesian economics may consider incumbents in terms of their investment behavior and response to changes in aggregate demand.
Marxian Economics
Incumbent firms are seen as protectors of existing capital structures, resisting new entrants that threaten current economic relationships.
Institutional Economics
This framework emphasizes the role of established relationships, norms, and institutions that favor incumbent firms over new entrants.
Behavioral Economics
Behavioral economics looks at how incumbents might leverage familiarity and consumer biases to maintain a dominant position in the market.
Post-Keynesian Economics
Post-Keynesian economic viewpoints critique the market conditions that allow incumbent firms to exert monopoly power due to historical advantages and market imperfections.
Austrian Economics
Austrian Economics values the entrepreneur’s role, seeing incumbent firms as crucial entities that have proven their value within a competitive marketplace.
Development Economics
From this perspective, incumbent firms can either hinder or help economic development, depending on how effectively they foster or stifle competition and innovation.
Monetarism
Monetarists would analyze how incumbent firms adjust to changes in monetary policy, given their established structures and market presence.
Comparative Analysis
Incumbent firms generally have better market positions due to established connections, experience, and previously incurred sunk costs, creating a competitive disadvantage for new entrants. Markets could be less dynamic, potentially stifling innovation due to the dominance of incumbents.
Case Studies
Examining cases like Microsoft’s dominance in the software market or Coca-Cola’s presence in the beverages sector can illustrate the competitive advantages held by incumbent firms.
Suggested Books for Further Studies
- “Industrial Organization: Contemporary Theory and Practice” by Pepall, Richards, and Norman
- “The Theory of Industrial Organization” by Jean Tirole
- “Modern Industrial Organization” by Dennis W. Carlton and Jeffrey M. Perloff
Related Terms with Definitions
- Contestable Market: A market in which the cost of entry and exit is low, ensuring that there is potential for ‘hit and run’ competition.
- Sunk Costs: Costs that have already been incurred and cannot be recovered.
- Learning by Doing: Efficiency improvements gained through accumulated experience and practice over time.
