Efficient regulated entry in competitive markets with demand uncertainty
Keywords: 
Competitive market
Demand uncertainty
Entry regulation
Free‐entry
Issue Date: 
2022
Publisher: 
Wiley
ISSN: 
1742-7363
Note: 
This is an open access article under the terms of the Creative Commons Attribution License
Citation: 
Bajo-Buenestado, R. (Raúl). "Efficient regulated entry in competitive markets with demand uncertainty". International Journal of Economic Theory. 19 (2), 2022, 413 - 422
Abstract
It is well‐known that, in a competitive market, the numberof firms in a free‐entry equilibrium is the efficient one.This paper shows that this textbook result breaks down iffirms face demand uncertainty. In this case, entry isexcessive relative to the optimum and, therefore, regula-tion improves market efficiency. This occurs because, inthe absence of regulation, entry is motivated by the profitsthat firms expect to receive if market demand turns out tobe high. However, when choosing the optimal regulatedentry, the planner also considers that some surplus is lostif demand turns out to be low.

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