Entry games and free entry equilibria

This chapter deals with the theories of market equilibria when the number and characteristics of active firms are endogenously determined through the process of entry. More precisely, we shall review the literature on entry games and free entry equilibria in a multi-stage game framework. A large number of potential entrants decide first whether to enter or not; once all the firms have undertaken their entry decisions, the active firms compete according to some oligopoly game. The chapter is organized as follows. In Section 2 we present the general analytical framework. In Section 3 we analyze a wide range of symmetric oligopoly models to identify the relationship between the number of firms and the market equilibria: we start with homogeneous products and competition in strategic substitutes (Section 3.1), moving then to differentiated products and competition in strategic complements (Section 3.2), next offering a general explanation of the comparative statics properties (Section 3.3) and concluding with cartels (Section 3.4). We then move to free entry equilibria and the determinants of the maximum number of firms (Section 4). Finally, we consider symmetric entry games under a normative perspective (Section 5), looking at the comparison between the free entry and the welfare-maximizing number of firms. In Section 6 we review asymmetric free entry equilibria that exploit the aggregative nature of most oligopoly models. We then present the case of endogenous sunk cost and persistent concentration (Section 7) and the case of frictionless entry and contestable markets (Section 8). Concluding remarks follow.