An analysis of market failure types in the entry decisions of firms

Abstract

In this research, we derive the sufficient conditions and types of market failures due to the discrepancies between private and social incentive in the entry decisions of firms. The main results of this paper are as follows. First, for the case where there is only one potential firm, market failure does not occur in the entry decision. Second, when there are two potential firms, there occurs too 'little entry' for the small technological progress, and 'excessentry' for the large one, which is irrespective of the social optimum standard. Third, when there are three potential firms, there occurs only 'excess entry' for the case where social optimum standard is 'social welfare' (or 'producer surplus'). And there occur both 'little entry' and 'excess entry' when social optimum standard is 'consumer surplus'. Fourth, for the case where the number of potential firms are 4 and 5, only 'excess entry' can occur for the 'social welfare' (or 'producer surplus') criterion case, and only 'little entry' can occur for the 'consumer surplus' standard case. Thus the market failure types are affected by the number of potential firms, the size of technological progress, and the social optimum standard. Therefore, it is necessary to decide the policy direction by considering these factors comprehensively.