Free Entry, Market Size, And The Optimistic Stability
AbstractWe examine the long-run outcomes under free entry-exit when each firm not only takes account of the effects of her own entry-exit on the market structure but also takes full account of the effects due to other firms' simultaneous entry-exit. Adopting the framework of the theory of social situations (TOSS), we derive a unique set of stable outcomes, which is based only on two fundamental assumptions of the "firms-as-profit-maximizers" and the "free entry-exit," but not on any specific mode of play (i.e., a specification of how the players make their decisions, take actions within the market, and think of the other players' behavior). We compare the stable outcome with the long-run equilibria under the competitive mode, the Cournot-Nash mode, and the monopolistically competitive mode. We find that (i) each of these equilibria can be compatible with the stable outcome only if the market size is small and (ii) none of them can be compatible with the stable outcome if the market size is sufficiently large; Further, (iii), for almost all market size, the monopolistically competitive equilibrium is compatible with the stable outcome if the elasticity of substitution is sufficiently close to (but, greater than) unity. In a sense, when the market size is sufficiently large, these three modes of play are not consistent with two fundamental assumptions.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.
Volume (Year): 09 (2007)
Issue (Month): 02 ()
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Web page: http://www.worldscinet.com/igtr/igtr.shtml
Find related papers by JEL classification:
- B4 - Schools of Economic Thought and Methodology - - Economic Methodology
- C0 - Mathematical and Quantitative Methods - - General
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
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- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D7 - Microeconomics - - Analysis of Collective Decision-Making
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