Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis

Recently, Mankiw-Winston [1986] and Suzumura-Kiyono [1987] have shown that socially excessive firm entry occurs in unregulated oligopoly. This paper extends this "excess entry" results by looking into strategic aspects of cost-reducing R&D investment that creates incentives towards socially excessive investments. In the first stage, firms decide whether or not to enter the market. In the second stage, firms make a commitment to cost-reducing R&D investment. In the thrid stage, firms compete in output quantities. It is shown that the excess entry holds even in the presence of strategic commtiments.