21 Pages Posted: 5 Aug 2009 Last revised: 30 Jan 2010
Date Written: August 3, 2009
In a model that encompasses a general equilibrium framework, we consider a monopolist (a producer) with subjective beliefs that endogenously hedges against fluctuations in input prices in a complete market. We allow for entries and Cournot competition in this economy, and we study the determinants of long-run survivals for those firms. We introduce a notion of entropy of beliefs, and we use it to characterize the class of beliefs for which the monopolist eventually disappears almost surely. When disappearance occurs, the whole market power switches to the entrant making the most accurate predictions in our sense. The class of beliefs for which survival occurs is much broader than that of competitive settings; the Market Selection Hypothesis is valid in our setting but the odds of survival are significantly higher in our strategic framework.
Keywords: market selection hypothesis, survival, entrants, Cournot competition, heterogenous beliefs
JEL Classification: G3, D82, D84
Suggested Citation: Suggested Citation