Free entry

Free entry is a term used by economists to describe a condition in which firms can freely enter the market for an economic good by establishing production and beginning to sell the product.

Free entry is implied by the perfect competition condition that there is an unlimited number of buyers and sellers in a market. In comparison to perfect competition, however, free entry is a condition often more applicable to real world conditions. To see this, suppose there is a good which not many people want, which is produced by only one firm. In this situation, there is not perfect competition. However, if there is free entry, the market is likely to be more efficient than if there is not. If the monopoly firm raises its prices too high, another firm could enter the market and take its customers. According to this reasoning, where there is free entry the economic damage caused by monopoly behavior may be mitigated.

Barriers to entry

Numerous barriers to entry could exist that restrict free entry:

• A resource is owned by a single firm. For instance, one business might control the only well for clean water in a region.
• The government might grant a single firm a monopoly. For instance, the state might bar competition to a state owned utility company. Alternatively, one business might possess a legal patent or copyright on a certain good.
• The structure of the market or the production process might make a single producer most efficient - this is called a natural monopoly.

References

N. Gregory Mankiw, Principles of Economics. Fort Worth: Harcourt, 2001.