Indeterminacy of free entry equilibria: general approach and macroeconomic applications

Free entry equilibria are usually determined by resorting to the zero proÞt condition. We plead instead for a strict application of the Nash equilibrium concept in a symmetric one-stage game where actual and po-tential producers have a decreasing average cost function, without sunk costs. Equilibrium then appears as typically indeterminate, with a number of active Þrms varying between an upper bound imposed by proÞtability and a lower bound required by sustainability. This indeterminacy may have signiÞcant macroeconomic implications, since it opens the way to coordination failures and to the emergence of endogenous ßuctuations due to the coordination process. The paper presents a general frame-work for the analysis of free entry equilibria, applies this framework to the standard regimes of price and quantity competition used in macroe-conomic modelling, and illustrates dynamic aggregate implications in a simple macroeconic model