Contestability and the indeterminacy of free-entry equilibria

A general notion of market perfect contestability is introduced. It coincides with the definition given by Baumol et al. under Bertrand competition, but is compatible with Cournot competition as well as monopolistic competition. Using this notion, we illustrate the fact that the number of active firms in free-entry equilibrium may be largely indeterminate and different levels of positive profits may in many cases be sustained. This is shown to be true, in spite of market perfect contestability, under either Cournot competition or product differentiation. Examples are given for both cases. Appropriate conditions of increasing returns are required. JEL Classification Numbers: D5, D43.