Free entry and social efficiency in an open economy

Is free entry desirable for social efficiency? We examine this question in an open economy context under a Cournot setup. Specifically, we consider a ‘home market’ where both home and foreign firms compete simultaneously. While free entry always leads to “excessive entry” in a closed economy setup (Mankiw and Whinston (1987), Suzumura and Kiyono (1986)), we find that free entry can be socially insufficient once there are some foreign firms. For linear demand, we find that as trade is liberalized, “insufficient entry” becomes more likely. This implies that entry regulation may not be as desirable as economies become more open. —————————————————— ∗ School of Economics, University of New South Wales, Sydney, NSW 2052, AUSTRALIA. e-mail: Ghosh: [email protected], Lim: [email protected], Morita: [email protected].