Comparative Statics in Cournot Free Entry Equilibrium

Abstract

In this paper we study the effects of a change in an exogenous variable (the fixed cost or a parameter in the demand function) on the output and the number of active firms in a Symmetric Cournot Equilibrium with Free Entry (SCEFE). The results obtained here are different from those obtained in the Cournot model with a given number of firms. In particular, an increase in demand might yield a decrease in the output of the industry.We also show that any observation on prices, profits and number of firms is compatible with the assumption that the market is in a SCEFE. If fixed costs can be observed, there is a loose relationship between the profit rate and the number of active firms. This result is used as a warning against the use of the profit rate as a measure of an anticompetitive position and against the Structure–Conduct– Performance paradigm.