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Free Entry and Social Efficiency under Unknown Demand Parameters

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  • Batlome Janjgava

Abstract

In the paper, I examine free entry in homogeneous product markets and its social efficiency. Previous research on free entry in homogeneous product markets has shown that under Cournot oligopoly with fixed setup costs the free entry equilibrium always delivers excessive entry. In contrast, I demonstrate in this paper that free entry along with excessive entry might also lead to a socially insufficient number of firms when a demand parameter uncertainty is considered. My findings support the validity of the traditional wisdom in industrial organization that free entry is desirable for social efficiency and call for revision of restrictive entry regulation practices which been based on previous research findings.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp495.

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Date of creation: Oct 2013
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Handle: RePEc:cer:papers:wp495

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Keywords: free entry; welfare; collusion; beliefs; learning; self-confirming equilibrium; escape dynamics;

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  1. Dekel, Eddie & Fudenberg, Drew & Levine, David K., 2004. "Learning to play Bayesian games," Games and Economic Behavior, Elsevier, Elsevier, vol. 46(2), pages 282-303, February.
  2. Dmitri Kolyuzhnov & Anna Bogomolova & Sergey Slobodyan, 2006. "Escape Dynamics: A Continuous—Time Approximation," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp285, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
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  4. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 525-546, April.
  5. Batlome Janjgava & Sergey Slobodyan, 2011. "Duopoly Competition, Escape Dynamics and Non-cooperative Collusion," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp445, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Takao Ohkawa & Makoto Okamura & Noritsugu Nakanishi & Kazuharu Kiyono, 2005. "The Market Selects The Wrong Firms In The Long Run ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1143-1165, November.
  7. Perry, Martin K, 1984. "Scale Economies, Imperfect Competition, and Public Policy," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 32(3), pages 313-33, March.
  8. Slade, Margaret E, 1989. "Price Wars in Price-Setting Supergames," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 56(223), pages 295-310, August.
  9. Federico Etro, 2010. "Endogenous market structures and antitrust policy," International Review of Economics, Springer, Springer, vol. 57(1), pages 9-45, March.
  10. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  11. Kotaro Suzumura, 2012. "Excess Entry Theorems After 25 Years," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 63(2), pages 152-170, 06.
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