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Free Entry under Uncertainty

  • Mohamed Jellal

    ()

  • François-Charles Wolff

    ()

When focusing on firm’s risk-aversion in industry equilibrium, the number of firms may be either larger or smaller when comparing market equilibrium with and without price uncertainty. In this paper, we introduce risk-averse firms under cost uncertainty in a model of spatial differentiation and show that the impact of uncertainty will increase the number of firms in an industry. With increased uncertainty, the risk premium of the marginal buyer increases by more than the risk premium of the average buyer, so that the price increases by more than the risk premium. When turning to the free entry game, we find that the market generates too many firms.

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File URL: http://hdl.handle.net/10.1007/s00712-005-0114-1
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Article provided by Springer in its journal Journal of Economics - Zeitschrift für Nationalökonomie.

Volume (Year): 85 (2005)
Issue (Month): 1 (07)
Pages: 39-63

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Handle: RePEc:kap:jeczfn:v:85:y:2005:i:1:p:39-63
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=108909

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  1. Maarten Janssen & Eric Rasmusen, 2000. "Bertrand Competition Under Uncertainty," Econometric Society World Congress 2000 Contributed Papers 1309, Econometric Society.
  2. Jellal, Mohamed & Thisse, Jacques-François & Zenou, Yves, 1998. "Demand Uncertainty, Mismatch and (Un)Employment: A Microeconomic Approach," CEPR Discussion Papers 1914, C.E.P.R. Discussion Papers.
  3. Vivek Ghosal, 2003. "Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics," CIG Working Papers SP II 2003-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  4. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  5. Friberg, Richard & Martensen, Kaj, 2000. "Variability and average profits - does Oi's result generalize?," SSE/EFI Working Paper Series in Economics and Finance 402, Stockholm School of Economics.
  6. Ghosal, Vivek, 1996. "Does uncertainty influence the number of firms in an industry?," Economics Letters, Elsevier, vol. 50(2), pages 229-236, February.
  7. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
  8. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  9. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
  10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  11. Vivek Ghosal & Prakash Loungani, 2000. "The Differential Impact of Uncertainty on Investment in Small and Large Businesses," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 338-343, May.
  12. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  13. Tessitore, Anthony, 1994. "Market segmentation and oligopoly under uncertainty," Journal of Economics and Business, Elsevier, vol. 46(2), pages 65-75, May.
  14. Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," SSE/EFI Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999.
  15. Appelbaum, Elie & Katz, Eliakim, 1986. "Measures of Risk Aversion and Comparative Statics of Industry Equilibrium," American Economic Review, American Economic Association, vol. 76(3), pages 524-29, June.
  16. Wambach, Achim, 1999. "Bertrand competition under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 941-951, October.
  17. repec:ebl:ecbull:v:4:y:2005:i:1:p:1-8 is not listed on IDEAS
  18. Andreas Wagener, 2005. "Linear risk tolerance and mean-variance preferences," Economics Bulletin, AccessEcon, vol. 4(1), pages 1-8.
  19. Rubinstein, Mark E, 1973. "A Comparative Statics Analysis of Risk Premiums," The Journal of Business, University of Chicago Press, vol. 46(4), pages 605-15, October.
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