Free Entry and Social Inefficiency

Abstract

Previous articles have noted the possibility of socially ineficient levels of entry in markets in whichJirms must incurjixed set-up costs upon entry. This article identijies thefundamental and intuitive forces that lie behind these entry biases. Ifan entrant causes incumbentJirms to reduce output, entry is more desirable to the entrant than it is to society. There is therefore a tendency toward excessive entry in homogeneous product markets. The roles of product diversity and the integer constraint on the number ofJirms are also examined. 1.