Abstract
By reformulating the Cournot model by making use of the optimal stopping theory, we reconsider the excess entry theorem for a stochastic market. It is revealed that: 1) free entry in a stochastic oligopolistic market is socially excessive, owing not only to the presence of scale economies but also to the value of waiting; 2) welfare maximizing number of the entrants is larger if the market is more uncertain.
Highlights
Since Mankiw and Whinston (1986) [1] established the excess entry theorem to reveal that entry is socially excessive to the oligopolistic market where homogeneous final goods are produced in a Cournot fashion by identical firms with economies of scale due to the existence of fixed costs, numerous attempts have been made to examine the robustness of that theorem by paying attention to various aspects that were assumed away in the original excess entry model, such as spatial competition (Matsumura and Okamura (2006) [2]), market power of producers (Ghosh and Morita (2007) [3] [4]), external economies of scale (Mukherjee (2010) [5]), market leadership (Mukherjee (2012) [6]), R&D tournament (Mukherjee and Wang (2011) [7]), and product differentiation (Kagitani, Ohkawa and Okamura (2015) [8])
In the present paper, formulating the fixed costs as irreversible investment under uncertainty, as well as inspired by Youn and Tremblay (2015) [9] that introduced Brownian motion to reveal new properties of oligopolistic market, we attempt to demonstrate another aspect of the excess entry theorem
We formulate the Cournot model by making use of the optimal stopping theory that has been used to determine the optimal timing in stochastic economies since McDo
Summary
Since Mankiw and Whinston (1986) [1] established the excess entry theorem to reveal that entry is socially excessive to the oligopolistic market where homogeneous final goods are produced in a Cournot fashion by identical firms with economies of scale due to the existence of fixed costs, numerous attempts have been made to examine the robustness of that theorem by paying attention to various aspects that were assumed away in the original excess entry model, such as spatial competition (Matsumura and Okamura (2006) [2]), market power of producers (Ghosh and Morita (2007) [3] [4]), external economies of scale (Mukherjee (2010) [5]), market leadership (Mukherjee (2012) [6]), R&D tournament (Mukherjee and Wang (2011) [7]), and product differentiation (Kagitani, Ohkawa and Okamura (2015) [8]).
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