Price and Entry Regulations with Large Fixed Costs

Abstract

Consider an industry with many potential firms, each firm characterized by a cost structure with large fixed costs. In determining the socially optimal resource allocation, the number of firms is a crucial variable. In this paper a relationship is established between pure profits with a fixed number of firms and the desirability of increasing or diminishing the number of firms in the industry. Both first-best and nonnegative profit-constrained, second-best cases are considered. The results are related to price and entry regulation in such an industry.