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Free entry equilibria with positive profits: A unified approach to quantity and price competition games

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Author Info

  • Rodolphe Dos Santos Ferreira

    (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)

  • Frédéric Dufourt

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR7316)

Abstract

Free entry equilibria are usually characterized by the zero profit condition. We plead instead for a strict application of theNash equilibriumconcept to a symmetric simultaneous game played by actual and potential entrants, producing under decreasing average cost. Equilibrium is then typically indeterminate, with a number of active firms varying between an upper bound imposed by profitability and a lower bound required by sustainability. We use a canonical model with strategies represented by prices, although covering standard regimes of quantity and price competition, to show that in equilibrium the critical (profit maximizing) price must lie between the break-even and the limit prices.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00796163.

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Date of creation: 01 May 2007
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Publication status: Published, International Journal of Economic Theory, 2007, 3, 2, 75-94
Handle: RePEc:hal:journl:halshs-00796163

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00796163
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Related research

Keywords: Free entry equilibrium; zero-profit condition; oligopolistic competition;

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References

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  1. Makoto Yano, 2006. "A price competition game under free entry," Economic Theory, Springer, vol. 29(2), pages 395-414, October.
  2. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
  3. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  4. d'ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, . "Contestability and the indeterminacy of free-entry equilibria," CORE Discussion Papers RP -1452, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Novshek, William, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 473-86, April.
  6. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  8. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Louis-André Gérard-Varet, 2007. "Competition For Market Share Or For Market Size: Oligopolistic Equilibria With Varying Competitive Toughness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 761-784, 08.
  9. d'ASPREMONT, C. & DOS SANTOS FERREIRA, R. & GÉRARD-VARET, L.-A., . "On the Dixit-Stiglitz model of monopolistic competition," CORE Discussion Papers RP -1211, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. 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.
  11. Brock, William A, 1983. "Contestable Markets and the Theory of Industry Structure: A Review Article," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1055-66, December.
  12. Corchon, Luis C. & Fradera, Isabel, 2002. "Comparative statics in Cournot free entry equilibrium," Mathematical Social Sciences, Elsevier, vol. 44(2), pages 155-168, November.
  13. Georg Götz, 2005. "Market Size, Technology Choice, and the Existence of Free-Entry Cournot Equilibrium," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(3), pages 503-, September.
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Cited by:
  1. 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.
  2. 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.
  3. Rodolphe Dos Santos Ferreira & Frédéric Dufourt, 2013. "On stabilization policy in sunspot-driven oligopolistic economies," Working Papers hal-00789233, HAL.

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