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Free entry does not imply zero profits

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  • Sjaak Hurkens
  • Nir Vulkan

Abstract

Traditional economic wisdom says that free entry in a market will drive profits down to zero. This conclusion is usually drawn under the assumption of perfect information. We assume that a priori there exists imperfect information about the profitability of the market, but that potential entrants may learn the demand curve perfectly at negligible cost by engaging in market research. Even if in equilibrium firms learn the demand perfectly, profits may be strictly positive because of insufficient entry. The mere fact that it will not become common knowledge that every entrant has perfect information about demand causes this surprising result. Belief means doubt. Knowing means certainty. Introduction to the Kabalah.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 268.

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Date of creation: Dec 1997
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Handle: RePEc:upf:upfgen:268

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Web page: http://www.econ.upf.edu/

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Keywords: Information_acquisition; entry; zero-profit_condition;

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References

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  1. Demsetz, Harold, 1982. "Barriers to Entry," American Economic Review, American Economic Association, American Economic Association, vol. 72(1), pages 47-57, March.
  2. Hwang Hae-shin, 1993. "Optimal Information Acquisition for Heterogenous Duopoly Firms," Journal of Economic Theory, Elsevier, Elsevier, vol. 59(2), pages 385-402, April.
  3. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 443-59, March.
  4. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 833-882.
  5. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers, Stanford - Studies in Industry Economics 151, Stanford - Studies in Industry Economics.
  6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Hurkens, Sjaak & Vulkan, Nir, 2001. "Information acquisition and entry," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 44(4), pages 467-479, April.
  9. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(4), pages 531-53, October.
  10. Boyan Jovanovic, 1981. "Entry With Private Information," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 12(2), pages 649-660, Autumn.
  11. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, Econometric Society, vol. 56(4), pages 851-76, July.
  12. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 863-94, July.
  13. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  14. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(4), pages 807-27, August.
  15. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  16. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 388-401, June.
  17. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  18. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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Citations

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Cited by:
  1. Sjaak Hurkens & Nir Vulkan, 2003. "Endogenous Private Information Structures," Working Papers 38, Barcelona Graduate School of Economics.
  2. Simeon Schudy & Verena Utikal, 2012. "The Influence of (Im)perfect Data Privacy on the Acquisition of Personal Health Data," TWI Research Paper Series, Thurgauer Wirtschaftsinstitut, Universität Konstanz 76, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  3. Sjaak Hurkens & Nir Vulkan, 1999. "Endogenous information structures," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 386, Department of Economics and Business, Universitat Pompeu Fabra.

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