Abstract
Our goal is to provide a simple, yet general, exposition of the conditions under which the number of entrants in a free-entry equilibrium is excessive, insufficient, or optimal. Our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market. That is, we consider the second-best problem of choosing the welfare-maximizing number of firms, while we take as given their noncompetitive behavior after entry. We demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants. In contrast to previous work, we do not need to model this postentry game explicitly.
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