Free Entrance and Social Welfare. Explaining the Causes of Excessive Entry Bias

Abstract

The economic theory has proved that free entry is not always advantageous from a social welfare point of view. Fro instance, a number of inefficiencies can arise from free entry in the presence of fixed set-up costs. Then, an excessive number of firms can usually be settled in homogeneous produc markets within an imperfect competition framework. The economic forces underlying the entry biases are somewhat obscure yet. This paper claims that capacity constraints and diseconomies of scale ought to be driving the discussion of this issue. The characteristics of the cost function, rather than other features, play the major role and should attract the attention of the future research effort. The paper develops an example with which to illustrate the discussion.