In economics, free entry is a condition in which firms can freely enter the market for an economic good by establishing production and beginning to sell the product. In most markets this condition is present only in the long run.
Free entry is part of the perfect competition assumption that there are an unlimited number of buyers and sellers in a market. In conditions in which there is not a natural monopoly caused by unlimited economies of scale, free entry prevents any existing firm from maintaining a monopoly, which would restrict output and charge a higher price than a multi-firm market would.
Free entry is usually accompanied by free exit, under which condition firms that are incurring losses (such as would happen if there are too many firms producing the product so that each is producing too little to be at its minimum efficient scale) can readily leave the market. However, exiting a market may involve abandonment costs.
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.
N. Gregory Mankiw, Principles of Economics. Fort Worth: Harcourt, 2001.