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Free entry equilibria with positive profits: A unified approach to quantity and price competition games

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  • Rodolphe Dos Santos Ferreira
  • Frédéric Dufourt

Abstract

Free entry equilibria are usually characterized by the zero profit condition. We plead instead for a strict application of the Nash equilibrium concept to a symmetric simultaneous game played by actual and potential entrants, producing under decreasing average cost. Equilibrium is then typically indeterminate, with a number of active firms varying between an upper bound imposed by profitability and a lower bound required by sustainability. We use a canonical model with strategies represented by prices, although covering standard regimes of quantity and price competition, to show that in equilibrium the critical (profit maximizing) price must lie between the break‐even and the limit prices.

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  • Rodolphe Dos Santos Ferreira & Frédéric Dufourt, 2007. "Free entry equilibria with positive profits: A unified approach to quantity and price competition games," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(2), pages 75-94, June.
    • Handle: RePEc:bla:ijethy:v:3:y:2007:i:2:p:75-94
    DOI: 10.1111/j.1742-7363.2007.00048.x
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    1. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Louis-André Gérard-Varet, 2007. "Competition For Market Share Or For Market Size: Oligopolistic Equilibria With Varying Competitive Toughness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 761-784, August.
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    5. Claude D’Aspremont & Rodolphe Dos Santos Ferreira & Louis-Andre Gerard-Varet, 2000. "Contestability and the Indeterminacy of Free-Entry Equilibria," The Japanese Economic Review, Japanese Economic Association, vol. 51(1), pages 72-83, March.
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    8. Dos Santos Ferreira, Rodolphe & Dufourt, Frederic, 2006. "Free entry and business cycles under the influence of animal spirits," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 311-328, March.
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    Cited by:

    1. Rodolphe Dos Santos Ferreira & Frédéric Dufourt, 2013. "On Stabilization Policy in Sunspot-Driven Oligopolistic Economies," AMSE Working Papers 1337, Aix-Marseille School of Economics, France, revised 30 Jun 2013.
    2. D’Amato Marcello & Di Pietro Christian & Sorge Marco M., 2020. "Credit allocation in heterogeneous banking systems," German Economic Review, De Gruyter, vol. 21(1), pages 1-33, April.
    3. Dos Santos Ferreira, Rodolphe & Lloyd-Braga, Teresa, 2008. "Business cycles with free entry ruled by animal spirits," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3502-3519, November.
    4. Makoto Yano, 2009. "The Foundation Of Market Quality Economics," The Japanese Economic Review, Japanese Economic Association, vol. 60(1), pages 1-32, March.
    5. Germán Coloma, 2010. "El número óptimo de empresas bajo competencia de Bertrand," Estudios de Economia, University of Chile, Department of Economics, vol. 37(2 Year 20), pages 189-205, December.
    6. 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.
    7. Takashi Komatsubara, 2008. "Equilibrium Selection In The Yano Model Of Price Leadership," Pacific Economic Review, Wiley Blackwell, vol. 13(5), pages 649-655, December.
    8. Marcello D'Amato & Christian Di Pietro & Marco M. Sorge, 2019. "Serving the (Un)Deserving? The Allocation of Credit in Markets with Asymmetrically Informed Lenders," CSEF Working Papers 539, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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