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Optimality of Entry Regulation under Incomplete Information

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  • Kim, Jaehong
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    Abstract

    The lack of complete information of the government has been considered as a barrier to the optimal regulation, as it is well-known in price regulations literature. However, it is not true for the entry regulation: This paper shows that the performance of the entry regulation under incomplete information can be better than that under complete information. Under incomplete information, the incumbent firm would deviate from the monopoly behavior to signal itself as an efficient type and to trigger entry regulation which prevents excess entry in case that the incumbent is efficient. As a result, social welfare can be even higher than under complete information, since not only the optimal post-entry market structure is achieved as under complete information but the pre-entry price is even lower than that under complete information.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/18779/1/HJeco0510200430.pdf
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    Bibliographic Info

    Article provided by Hitotsubashi University in its journal Hitotsubashi Journal of Economics.

    Volume (Year): 51 (2010)
    Issue (Month): 2 (December)
    Pages: 43-58

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    Handle: RePEc:hit:hitjec:v:51:y:2010:i:2:p:43-58

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    Related research

    Keywords: Incomplete Information; Excess Entry; Entry Regulation; Signaling;

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    References

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    1. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
    3. Schmidt, Klaus M., 1996. "The costs and benefits of privatization: An incomplete contracts approach," Munich Reprints in Economics 19773, University of Munich, Department of Economics.
    4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    5. Suzumura, Kotaro & Kiyono, Kazuharu, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 157-67, January.
    6. Laffont, Jean-Jacques, 1994. "The New Economics of Regulation Ten Years After," Econometrica, Econometric Society, vol. 62(3), pages 507-37, May.
    7. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
    8. Kim, Jaehong, 2003. "Limit Pricing Through Entry Regulation," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 44(1), pages 1-13, June.
    9. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
    10. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
    11. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    12. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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