Free Entry & Social Welfare

Abstract

This paper examines excess entry problems in simultaneous free entry games of homogeneous product markets. We start our discussion from the static model, then extend to the dynamic model, and incorporate tax as an additional variable to evaluate the excess/insufficient entry problems. While the static model has high possibility of insufficient entry, an unregulated entry process in the dynamic model usually leads to excess entry. This phenomenon becomes more significant especially when the entry game is played for several rounds. Properties of social welfare under different market circumstances are also discussed. Finally, we numerically solve the tax/subsidy curves which maximize the social welfare under different market environments.