Free entry does not imply zero profits

Sjaak Hurkens and Nir Vulkan

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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 (search for similar items in EconPapers)
JEL-codes: C72 D43 D82 (search for similar items in EconPapers)
Date: 1997-12
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:268

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