An informational externality in a competitive market

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Consider a (new) competitive market with unknown demand. The market price generated by incumbents conveys information that firms, including potential entrants, use for future decisions. Yet the incumbents are not rewarded for their assistance, suggesting that an inefficiency can exist. It has been argued that greater entry generates more information about a new market and should be subsidized. A simple model of partial information and learning is developed, finding that an informational externality can exist in competitive markets, but there may be excessive entry. Free entry and a public price, conditions for competitive market efficiency, are conditions for inefficiency.

Original languageEnglish
Pages (from-to)331-344
Number of pages14
JournalInternational Journal of Industrial Organization
Volume14
Issue number3
DOIs
StatePublished - May 1996

Keywords

  • Experimentation
  • Incomplete information
  • Informational externality

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

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