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Free entry does not imply zero profits

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  • Hurkens, Sjaak
  • Vulkan, Nir

Abstract

Traditional economic wisdom says that free entry in a market will drive profits down to zero. This conclusion is usually drawn under the assumption of perfect information. We assume that a priori there exists imperfect information about the profitability of the market, but that potential entrants may learn the demand curve perfectly at negligible cost by engaging in market research. Even if in equilibrium firms learn the demand perfectly, profits may be strictly positive because of insufficient entry. The mere fact that it will not become common knowledge that every entrant has perfect information about demand causes this surprising result. Belief means doubt. Knowing means certainty. Introduction to the Kabalah.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 81 (2003)
Issue (Month): 3 (December)
Pages: 285-290

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Handle: RePEc:eee:ecolet:v:81:y:2003:i:3:p:285-290

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Cited by:
  1. Simeon Schudy & Verena Utikal, 2012. "The Influence of (Im)perfect Data Privacy on the Acquisition of Personal Health Data," TWI Research Paper Series 76, Thurgauer Wirtschaftsinstitut, Universit├Ąt Konstanz.
  2. Sjaak Hurkens & Nir Vulkan, 2000. "Endogenous Private Information Structures," Econometric Society World Congress 2000 Contributed Papers 0613, Econometric Society.
  3. Sjaak Hurkens & Nir Vulkan, 1999. "Endogenous information structures," Economics Working Papers 386, Department of Economics and Business, Universitat Pompeu Fabra.

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