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Free Entry and Social Inefficiency

N. Gregory Mankiw and Michael D. Whinston
The RAND Journal of Economics
Vol. 17, No. 1 (Spring, 1986), pp. 48-58
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555627
Page Count: 11
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Free Entry and Social Inefficiency
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Abstract

Previous articles have noted the possibility of socially inefficient levels of entry in markets in which firms must incur fixed set-up costs upon entry. This article identifies the fundamental and intuitive forces that lie behind these entry biases. If an entrant causes incumbent firms 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 of firms are also examined.

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