The Market Selects the Wrong Firms in the Long Run*

Abstract

We consider the effects of free entry on the market structure and social welfare of an asymmetric Cournot oligopoly. Even if we allow for the existence of different types of firms initially, only one type (in almost all cases) can survive in the long run. Free entry leads an economy to a symmetric equilibrium, in which the excess entry theorem holds. Further, we consider the socially optimal policy for this economy. In cases of either (i) a concave demand (which implies strategic substitutability) or (ii) strategic complementarity (which implies a convex demand), the type of firms that should remain in the market to achieve social optimality does not necessarily coincide with the type of firms that will survive in the long run. The market may select not only the wrong number of firms but also the wrong type of firms in the long run.

Market Structure and Privatization Policy Under International Competition*

“…13 13 In both the mixed oligopoly and the private oligopoly, the number of entering firms in the free entry equilibrium is excessive; this yields these results. See Mankiw and Whinston (1986), Suzumura and Kiyono (1987), Ohkawa et al . (2005, 2012), Matsumura and Kanda (2005), and Wang and Chen (2010).…”

The Tragedy of the Anti-Commons in the Long Run in a Common-Resource Economy*

“…9 Excess entry literature has extended into some directions. For example, Ohkawa et al (2005) investigated long-run equilibrium with two types of firms. 10 Kühn and Vives (1999) examine the effect of vertical integration on welfare when an upstream monopolist vertically integrates with downstream monopolistically competitive firms.…”

“…9 9 Excess entry literature has extended into some directions. For example, Ohkawa et al . (2005) investigated long‐run equilibrium with two types of firms. …”

Does the Excess Entry Theorem Hold in a Differentiated Oligopoly?

“…Some recent works have expanded upon the excess entry theorem. For instance, Ohkawa et al (2005) * Manuscript received 28.3.14; final version received 23.3.15. † We would like to express our gratitude to the Editor Antonio Nicolo and two anonymous referees for their helpful and constructive suggestions that greatly improved our paper.…”