Entry and social efficiency under Bertrand competition and asymmetric information

This paper explores the welfare implications of free entry when firms face known entry costs, but production costs are privately known. Upon entering, firms compete in prices to supply a homogeneous good. Our framework yields results that are more nuanced than those of the literature on social efficiency and entry, where there is either insufficient or excessive entry for all parameter values. With asymmetric information, depending on the distribution of costs, and the magnitude of entry costs, it is possible to have both excessive and insufficient entry, as well as the optimal level of entry. We also show that the existence of entry costs fundamentally changes one of the key results of Spulber (J Ind Econ 43(1):1-11) on the convergence of the equilibrium price to the competitive equilibrium.