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Free Entry and Social Efficiency under Unknown Demand Parameters

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  • Batlome Janjgava

Abstract

In the paper, I examine free entry in homogeneous product markets and its social efficiency. Previous research on free entry in homogeneous product markets has shown that under Cournot oligopoly with fixed setup costs the free entry equilibrium always delivers excessive entry. In contrast, I demonstrate in this paper that free entry along with excessive entry might also lead to a socially insufficient number of firms when a demand parameter uncertainty is considered. My findings support the validity of the traditional wisdom in industrial organization that free entry is desirable for social efficiency and call for revision of restrictive entry regulation practices which been based on previous research findings.

Suggested Citation

  • Batlome Janjgava, 2013. "Free Entry and Social Efficiency under Unknown Demand Parameters," CERGE-EI Working Papers wp495, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp495
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp495.pdf
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    References listed on IDEAS

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    1. C.C. von Weizsaker, 1980. "A Welfare Analysis of Barriers to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 399-420, Autumn.
    2. Federico Etro, 2010. "Endogenous market structures and antitrust policy," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(1), pages 9-45, March.
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    4. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, April.
    5. Batlome Janjgava & Sergey Slobodyan, 2011. "Duopoly Competition, Escape Dynamics and Non-cooperative Collusion," CERGE-EI Working Papers wp445, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
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    8. Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014. "Escape dynamics: A continuous-time approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 161-183.
    9. Balvers, Ronald J & Cosimano, Thomas F, 1990. "Actively Learning about Demand and the Dynamics of Price Adjustment," Economic Journal, Royal Economic Society, vol. 100(402), pages 882-898, September.
    10. Perry, Martin K, 1984. "Scale Economies, Imperfect Competition, and Public Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 313-333, March.
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    12. Takao Ohkawa & Makoto Okamura & Noritsugu Nakanishi & Kazuharu Kiyono, 2005. "The Market Selects The Wrong Firms In The Long Run ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1143-1165, November.
    13. Kotaro Suzumura, 2012. "Excess Entry Theorems After 25 Years," The Japanese Economic Review, Japanese Economic Association, vol. 63(2), pages 152-170, June.
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    Cited by:

    1. Li Xiang & Xu Yanmei, 2020. "Can Positive Entrepreneurship Policies Always Improve Social Welfare?," Journal of Systems Science and Information, De Gruyter, vol. 8(2), pages 148-158, April.

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    More about this item

    Keywords

    free entry; welfare; collusion; beliefs; learning; self-confirming equilibrium; escape dynamics;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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