Social desirability of free entry: A bilateral oligopoly analysis

This paper explores the social desirability of free entry by analyzing a bilateral oligopoly model with bargaining that incorporates the entry process of firms. We demonstrate that free entry in an industry producing a homogeneous final product leads to a socially insufficient number of firms when the suppliers of the intermediate products have sufficiently strong bargaining power. This is in contrast to previous findings in the theoretical industrial organization literature, which demonstrate that in homogeneous final-product markets with Cournot oligopoly and fixed set-up costs, level of entry in the free-entry equilibrium is always socially excessive. Our analysis yields an important policy implication, given that the standard excess-entry result has often been used as a justification for apparently anti-competitive entry regulations.