On excessive entry in Bayes‐Cournot oligopoly

Abstract In a Cournot industry where firms are privately informed about their marginal costs, raising entry barriers (i.e., imposing strictly positive, but not too large, entry costs) increases expected output, entrants' profits, total welfare, and might benefit consumers. Under Bayes‐Cournot competition, firms react to the expectation (conditional on entry) of rivals' costs rather than to their actual costs. This creates scope for entry by relatively inefficient types. Entry costs that prevent these high‐cost types from entering increase inframarginal (lower‐cost) types' and rivals' expected output. As a result, they increase profits and, unless they reduce output variability too much, also consumer surplus.