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Free Entry under Uncertainty

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  • Mohamed Jellal
  • François-Charles Wolff

Abstract

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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Suggested Citation

  • Mohamed Jellal & François-Charles Wolff, 2005. "Free Entry under Uncertainty," Journal of Economics, Springer, vol. 85(1), pages 39-63, July.
    • Handle: RePEc:kap:jeczfn:v:85:y:2005:i:1:p:39-63
    DOI: 10.1007/s00712-005-0114-1
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    References listed on IDEAS

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    Cited by:

    1. Lisa Anderson & Beth Freeborn & Jason Hulbert, 2012. "Risk Aversion and Tacit Collusion in a Bertrand Duopoly Experiment," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(1), pages 37-50, February.
    2. Piccolo, Salvatore, 2011. "A note on free entry under uncertainty: The role of asymmetric information," Economics Letters, Elsevier, vol. 111(3), pages 256-259, June.
    3. Kalamov, Zarko Y., 2013. "Risk sharing and the efficiency of public good provision under tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 676-683.

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    More about this item

    Keywords

    spatial differentiation; risk-averse firms; cost uncertainty; D43; D81; L12;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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