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Free entry does not imply zero profits

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  • Hurkens, Sjaak
  • Vulkan, Nir

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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  • Hurkens, Sjaak & Vulkan, Nir, 2003. "Free entry does not imply zero profits," Economics Letters, Elsevier, vol. 81(3), pages 285-290, December.
    • Handle: RePEc:eee:ecolet:v:81:y:2003:i:3:p:285-290
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    Cited by:

    1. Levy, Yehuda John & Veiga, Andre, 2020. "On the existence of positive equilibrium profits in competitive screening markets," Games and Economic Behavior, Elsevier, vol. 124(C), pages 140-168.
    2. Simeon Schudy & Verena Utikal, 2012. "The Influence of (Im)perfect Data Privacy on the Acquisition of Personal Health Data," Working Paper Series of the Department of Economics, University of Konstanz 2012-12, Department of Economics, University of Konstanz.
    3. Sjaak Hurkens & Nir Vulkan, 1999. "Endogenous information structures," Economics Working Papers 386, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Hurkens, Sjaak & Vulkan, Nir, 2006. "Endogenous private information structures," European Economic Review, Elsevier, vol. 50(1), pages 35-54, January.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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