Free entry into markets with decreasing average costs and differentiated products can result in an inefficient number of firms and suboptimal product variety. Because new firms and products draw their customers in part from existing products, concentration can affect incentives to enter as well...

In theory, free entry can lead to social inefficiency. When new products are substitutes for existing products, the business stolen from incumbents places a wedge between private and social benefits of entry. The business stealing effect can be offset if entry reduces prices or increases...

A vast theoretical literature shows that inefficient market structures may arise in free entry equilibria. The inefficiency may manifest itself in the number, variety, or quality of products. Previous empirical work demonstrated that excessive entry may obtain in local radio markets. Our paper...