Contestability and the indeterminacy of free-entry equilibria

A general notion of market perfect contestability is introduced. It coincid es with the definition given by Baumol ei al. under Bertrand competition, b ut is compatible with Cournot competition as well as monopolistic competiti on. Using this notion, we illustrate the fact that the number of active fir ms in free-entry equilibrium may be largely indeterminate and different lev els of positive profits may in many cases be sustained. This is shown to be true, in spite of market perfect contestability, under either Cournot comp etition or product differentiation. Examples are given for both cases. Appr opriate conditions of increasing returns are required. JEL Classification N umbers: D5, D43.