Welfare Analysis of Free Entry in a Dynamic General Equilibrium Model

Posted by D. Daniel Sokol

Koichi Futagami (Graduate School of Economics, Osaka University), Tatsuro Iwaisako (Graduate School of Economics, Osaka University), and Makoto Okamura (Economics Department, Hiroshima University) address Welfare Analysis of Free Entry in a Dynamic General Equilibrium Model.

ABSTRACT: This paper presents a welfare analysis of free entry equilibrium in dynamic general equilibrium environments with oligopolistic competition. First, we show that a marginal decrease in the number of firms at the free entry equilibrium improves social welfare. Second, we show that if a government can control the number of entrants intertemporally so as to maximize the level of social welfare, the number of entrants under free entry may be less than the second-best number of entrants. Capital accumulation plays an important role in determining whether excess entry occurs.