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Free entry does not imply zero profits

  • Hurkens, Sjaak
  • Vulkan, Nir

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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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 81 (2003)
Issue (Month): 3 (December)
Pages: 285-290

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Handle: RePEc:eee:ecolet:v:81:y:2003:i:3:p:285-290
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  1. Harold Demsetz, 1981. "Barriers to Entry," UCLA Economics Working Papers 192, UCLA Department of Economics.
  2. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 531-53, October.
  3. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
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  9. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, vol. 56(4), pages 851-76, July.
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  14. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
  15. Hwang Hae-shin, 1993. "Optimal Information Acquisition for Heterogenous Duopoly Firms," Journal of Economic Theory, Elsevier, vol. 59(2), pages 385-402, April.
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