Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand

Abstract:     
This paper analyzes market diffusion in the presence of oligopolistic interaction among firms. Market demand is positively related to past market size because of consumer learning, networks, and bandwagon effects. Firms enter the market freely in each period with fixed costs and compete in quantities. We demonstrate that the nature of the inefficiency under free entry can change as the market grows, and more importantly, that S-shaped diffusion can be a signal that the number of firms under free entry is initially insufficient, but eventually excessive.

Number of Pages in PDF File: 33

Keywords: Free Entry, Market Diffusion, Intertemporal Externalities, Oligopolistic Interaction, S-shaped Diffusion

JEL Classification: D11, L11, L14

working papers series