Entry Barriers and Economic Welfare

TLDR

The analysis assumes a first‑best government that enforces marginal‑cost pricing and regulates the number of firms. The study investigates how the number of firms in a quasi‑Cournot market influences economic welfare. Free‑entry equilibrium yields an excessive number of firms relative to the welfare‑maximizing level, and this excess persists even when a second‑best regulator merely limits entry.

Abstract

The relationship between economic welfare and the number of firms in a quasi-Cournot market is examined. In the first place, we presuppose the existence of a strong ("first-best") government that can enforce the marginal-cost principle to the firms along with regulating the number of firms. It is shown that there exist excessive number of firms at the free-entry quasi-Cournot equilibrium vis-à-vis the "first-best" welfare maximizing number of firms. The thrust of this result essentially survives even if we replace a Utopian "first-best" government by a "second-best" government that leaves the firms to pursue their respective profit maximization freely and engages solely in regulating the number of firms. It can be shown that the excess entry prevails again in this "second-best" world.