Free Entry and Social Inefficiency under Co-opetition

We investigate the social desirability of free entry in the co-opetition model in which firms compete in a homogeneous product market while sharing common property resources that affect market size or consumers’ willingness to pay for products. We show that free entry leads to socially excessive or insufficient entry into the market in the case of non-commitment co-opetition, depending on the magnitude of “business stealing” and “common property” effects of entry. On the other hand, in the case of pre-commitment co-opetition, free entry leads to excess entry and a decline in the common property resources. Interestingly, in the latter case, the excess entry result of Mankiw and Whinston (1986) and Suzumura and Kiyono (1987) holds even when there are no entry (set-up) costs for entrants. These results have important policy implications for entry regulations.