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Contestability and the indeterminacy of free entry equilibria

Author

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  • d’ASPREMONT, Claude

    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • DOS SANTOS FERREIRA, Rodolphe

    (BETA, Université Louis Pasteur, Strasbourg, France)

  • GERARD-VARET, Louis-André

    (GREQAM, Ecole des Hautes Etudes en Sciences Sociales, Marseille, France)

Abstract

A general notion of market perfect contestability is introduced. It coincides with the definition given by Baumol et al. under Bertrand competition, but is compatible with other forms of competition : Cournot competition as well as monopolistic competition. Using this notion, we illustrate the fact that the number of active firms in free entry equilibrium may be largely indeterminate and different levels of positive profits may in many cases be sustained. This is shown to be true, in spite of market perfect contestability, either under Cournot competition or under product differentiation. Examples are given for both cases. Appropriate conditions of increasing returns are required.

Suggested Citation

  • d’ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, 1997. "Contestability and the indeterminacy of free entry equilibria," LIDAM Discussion Papers CORE 1997073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:1997073
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    Cited by:

    1. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa, 2008. "Business cycles with free entry ruled by animal spirits," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3502-3519, November.
    2. Frederic Dufourt & Rodolphe Dos Santos Ferreira, 2006. "Indeterminacy of Free Entry Equilibria: General Approach and Macroeconomic Applications," EcoMod2006 272100021, EcoMod.
    3. Rabah Amir, "undated". "Market Structure, Scale Economies and Industry Performance," CIE Discussion Papers 2000-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    4. Rodolphe Dos Santos Ferreira & Frédéric Dufourt, 2007. "Free entry equilibria with positive profits: A unified approach to quantity and price competition games," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(2), pages 75-94, June.
    5. Germán Coloma, 2010. "El número óptimo de empresas bajo competencia de Bertrand," Estudios de Economia, University of Chile, Department of Economics, vol. 37(2 Year 20), pages 189-205, December.
    6. d’Aspremont, Claude & Dos Santos Ferreira, Rodolphe, 2017. "The Dixit–Stiglitz economy with a ‘small group’ of firms: A simple and robust equilibrium markup formula," Research in Economics, Elsevier, vol. 71(4), pages 729-739.
    7. Dos Santos Ferreira, Rodolphe & Dufourt, Frederic, 2006. "Free entry and business cycles under the influence of animal spirits," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 311-328, March.

    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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