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Efficient regulated entry in competitive markets with demand uncertainty

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  • Raúl Bajo‐Buenestado

Abstract

It is well‐known that, in a competitive market, the number of firms in a free‐entry equilibrium is the efficient one. This paper shows that this textbook result breaks down if firms face demand uncertainty. In this case, entry is excessive relative to the optimum and, therefore, regulation improves market efficiency. This occurs because, in the absence of regulation, entry is motivated by the profits that firms expect to receive if market demand turns out to be high. However, when choosing the optimal regulated entry, the planner also considers that some surplus is lost if demand turns out to be low.

Suggested Citation

  • Raúl Bajo‐Buenestado, 2023. "Efficient regulated entry in competitive markets with demand uncertainty," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(2), pages 413-422, June.
    • Handle: RePEc:bla:ijethy:v:19:y:2023:i:2:p:413-422
    DOI: 10.1111/ijet.12359
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    References listed on IDEAS

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