Entry Bias and Product Substitutability

The literature has established two kinds of entry bias in imperfectly competitive markets. First, free entry may lead to excessive entry relative to the socially optimal level. Second, free entry may lead to the wrong technology (type of firm) in the market compared to the socially optimal technology. This paper finds a product selection bias, a third kind of entry bias. We show that, in a Cournot market with asymmetric firms and imperfectly substituting goods, free entry may lead to fewer types of goods, more types of goods, or even a different type of good, compared to the social optimum.