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Free entry versus socially optimal entry

Author

Listed:
  • Amir, Rabah
  • De Castro, Luciano
  • Koutsougeras, Leonidas

Abstract

This paper reconsiders the well-known comparison of equilibrium entry levels into a Cournot industry under free entry, second best (control of entry but not production) and first best (control of entry and production). Allowing for the possibility of limited increasing returns to scale in production, this paper generalizes the conclusion of Mankiw and Whinston (1986) [10], that under business-stealing competition, free entry yields more firms than the second-best solution. We also show that under-entry always holds under business-enhancing competition. This confirms the general intuition given by Mankiw and Whinston, which does not rely on the convexity of the cost function. The same result is shown to extend (at a similar level of generality) to the comparison between free entry and the first best socially optimal solution, irrespective of business-stealing. Three illustrative examples are provided, one showing that the second-best and free entry solutions may actually coincide.

Suggested Citation

  • Amir, Rabah & De Castro, Luciano & Koutsougeras, Leonidas, 2014. "Free entry versus socially optimal entry," Journal of Economic Theory, Elsevier, vol. 154(C), pages 112-125.
  • Handle: RePEc:eee:jetheo:v:154:y:2014:i:c:p:112-125
    DOI: 10.1016/j.jet.2014.09.003
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    References listed on IDEAS

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    1. Kotaro Suzumura & Kazuharu Kiyono, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 157-167.
    2. William Novshek, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 85-98.
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    Citations

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    Cited by:

    1. Michele Polo, 2016. "Entry Games and Free Entry Equilibria," IEFE Working Papers 87, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
    2. Lisa Planer-Friedrich & Marco Sahm, 2017. "Strategic Corporate Social Responsibility," CESifo Working Paper Series 6506, CESifo Group Munich.
    3. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9434-z is not listed on IDEAS
    4. Planer-Friedrich, Lisa & Sahm, Marco, 2017. "Strategic corporate social responsibility," BERG Working Paper Series 124, Bamberg University, Bamberg Economic Research Group.
    5. Laszlo Goerke, 2017. "Tax evasion in a Cournot oligopoly with endogenous entry," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 754-779, September.

    More about this item

    Keywords

    Free entry; Entry regulation; Socially optimal entry; Cournot oligopoly; Supermodularity;

    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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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