Paper #268

Title:

Free entry does not imply zero profits

Authors:

Sjaak Hurkens and Nir Vulkan

Date:

December 1997

Abstract:

Traditional economic wisdom says that free entry in a market will drive profits down to zero. This conclusion is usually drawn under the assumption of perfect information. We assume that a priori there exists imperfect information about the profitability of the market, but that potential entrants may learn the demand curve perfectly at negligible cost by engaging in market research. Even if in equilibrium firms learn the demand perfectly, profits may be strictly positive because of insufficient entry. The mere fact that it will not become common knowledge that every entrant has perfect information about demand causes this surprising result. Belief means doubt. Knowing means certainty. Introduction to the Kabalah.

Keywords:

Information_acquisition, entry, zero-profit_condition

JEL codes:

C72, D43, D82

Area of Research:

Microeconomics

Published in:

Economics Letters, 81, 3, (2003), pp. 285-290

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