Dynamic Entry, Competition, and Welfare Loss under Uncertainty

Abstract

This paper examines irreversible market entry under uncertainty in a Cournot oligopoly framework. While standard static Cournot models imply that increased competition monotonically reduces deadweight loss, this paper shows that intensified competition can amplify dynamic welfare losses when entry is irreversible and demand conditions are uncertain. Using a real-options approach, we derive closed-form expressions for privately and socially optimal entry thresholds and demonstrate that the wedge between them increases with the number of firms. Although greater competition improves static allocative efficiency by lowering prices, it reduces private entry incentives more rapidly than social benefits, leading firms to delay entry inefficiently. As a result, dynamic welfare losses arising from delayed market creation grow even as static inefficiency vanishes. These findings highlight a fundamental tension between static and intertemporal welfare effects of competition.