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Free entry equilibria with positive profits: A unified approach to quantity and price competition games
Author(s) -
Ferreira Rodolphe Dos Santos,
Dufourt Frédéric
Publication year - 2007
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2007.00048.x
Subject(s) - economics , profitability index , nash equilibrium , profit (economics) , microeconomics , free entry , mathematical economics , upper and lower bounds , strategy , econometrics , game theory , mathematics , mathematical analysis , finance
Free entry equilibria are usually characterized by the zero profit condition. We plead instead for a strict application of the Nash equilibrium concept to a symmetric simultaneous game played by actual and potential entrants, producing under decreasing average cost. Equilibrium is then typically indeterminate, with a number of active firms varying between an upper bound imposed by profitability and a lower bound required by sustainability. We use a canonical model with strategies represented by prices, although covering standard regimes of quantity and price competition, to show that in equilibrium the critical (profit maximizing) price must lie between the break‐even and the limit prices.