Entry and social efficiency under Bertrand competition and asymmetric information

This paper explores the welfare implications of free entry when firms face known entry costs, but production costs are privately known. Upon entering, firms compete in prices to supply a homogeneous good. Our framework yields results that are more nuanced than those of the literature on free entry, where there is either insufficient or excessive entry. Depending on the distribution of costs, the value of the entry fee, and the number of potential entrants, it is possible to have both excessive and insufficient entry as parameters change. We also show that the existence of entry costs fundamentally changes one of the key results of Spulber (1995) on the convergence of the equilibrium price to the competitive equilibrium. Instead, with entry costs, we have shown that the probability of excessive entry goes to one as the number of potential firms goes to infinity.