Free Entry under Uncertainty
AbstractWhen focusing on firmâs risk-aversion in industry equilibrium, the number of firms may be either larger or smaller when comparing market equilibrium with and without price uncertainty. In this paper, we introduce risk-averse firms under cost uncertainty in a model of spatial differentiation and show that the impact of uncertainty will increase the number of firms in an industry. With increased uncertainty, the risk premium of the marginal buyer increases by more than the risk premium of the average buyer, so that the price increases by more than the risk premium. When turning to the free entry game, we find that the market generates too many firms.
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Bibliographic InfoArticle provided by Springer in its journal Journal of Economics - Zeitschrift für Nationalökonomie.
Volume (Year): 85 (2005)
Issue (Month): 1 (07)
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Web page: http://www.springerlink.com/link.asp?id=108909
spatial differentiation; risk-averse firms; cost uncertainty; D43; D81; L12;
Other versions of this item:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D4 - Microeconomics - - Market Structure and Pricing
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