Entry and price dynamics in a perfect foresight model

Abstract

This paper studies firms' entry and price dynamics in a model that combines the assumptions of free entry and perfect foresight with the hypothesis of consumer's loyalty postulated by Phelps and Winter. The analysis of the transition to long-run equilibrium reveals that, in such a model, the entry of firms is related to the difference between current prices and costs. In relation to the growth of the firms' output, it is shown that the model is consistent with Gibrat's Law. Finally, it is shown that the size distribution of firms approaches asymptotically a Pareto distribution.