Social Efficiency of Entry with Market Leaders

We offer a new perspective to the social efficiency of entry by considering an industry with a quantity-setting leader and free entry of followers. We show that entry with homogeneous products can be socially insufficient instead of excessive. In a closed economy, entry is always socially insufficient in the absence of scale economies, and it is socially insufficient in the presence of scale economies if the marginal cost difference between the leader and the followers is large. In an open economy with the foreign leader, entry is always socially insufficient. Thus, we show that entry regulation may not be justified in oligopolistic industries with market leaders.