Free entry versus socially optimal entry

This paper reconsiders the well known comparison of equilibrium entry levels into a Cournot industry under free entry and under the two commonly used socially optimal schemes. Allowing for the possibility of increasing returns to scale in production, this paper generalizes the conclusion of [Mankiw and Whinston, Rand J. 1986], that free entry yields more …rms than the second-best socially optimal solution, for Cournot competition. We show that the most general set of assumptions that guarantee the existence of Cournot equilibria, the above conclusion holds. This con…rms the general intuition given by Mankiw and Whinston, which does not rely on the convexity of the cost function. The same result is shown to extend (at a similar level of generality) to the comparison between free entry and the …rst best socially optimal solution. The approach relies on lattice-theoretic methods. JEL codes: C72, D43, L13.