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Journal
Article ‘Free Entry and Social Inefficiency”
Name
Institution/Affiliation
The
journal article on ‘Free entry and social efficiency” was written by Gregory
Mankiw and Michael Whinston, it was published in 1986 by Wiley on behalf of the
Rand Corporation. The authors were inspired
by the writings and findings of previous articles that researched and compiled
evidence on the existence of the possibility of socially inefficient levels
that affects firms trying to enter new markets. According to Mankiw and
Whinston (1986, p. 48), this article
focuses on the identification of fundamental and spontaneous forces that affect
and influence entrant firms. The entry in
a market results in the already existing firms to act by reducing production
levels; entry is desired more by entrant
firms as compared to the incumbent firms. The authors argue that the biases
regarding entry results in the depiction of tendencies towards excessive entry,
most especially in homogeneous product
markets. Besides, the article examines the role played by integer constraint as
well as product diversity on both entrant and incumbent firms. Mankiw and
Whinston (1986, p. 48) state that “economists typically presume that free entry
is desirable for social efficiency,”
notably because the underlying economic forces of entry biases remain somewhat
mysterious.
The primary purpose
of this journal article is to investigate the fundamental economic forces that
determine whether the free-entry of firms is excessive, insufficient, or
optimal. Further, it addresses the question of the conditions that influence
the establishment of entry bias, by focusing on the outcome realized after
post-entry phase. The method of analysis in this article is based on the comparison of the entrant firms
during free entry of a specific number of
socially acceptable firms by a social planner who fails to control those firms
after initial entry. The analysis method is highly reasonable as it focuses on
comparing the specific firms desired by a welfare-maximizing social planner
with the particular entrants firm
entering the market freely (Manhiw & Whinston, 1986, p. 50). A two-stage game supports this analysis. As a
consequence, the authors try to put into consideration the most straightforward way of coming up with a
welfare-maximizing number of firms bearing in mind their non-competitiveness
after entry.
The
importance of this research questions is
that the authors get to focus on the development of a post-entry game model to
determine how free entry is desirable for social efficiency. Ahlbrecht and
Eckhert (2013, p. 638) argue that this approach is advantageous as it explains
the forces behind entry biases as well as provide ways that can be used to
check the entry biases. The main findings of this article based on the two-stage post entry game model are very
sensible. The results of using the model
to investigate the effect of homogenous product markets and product diversity
on the direction of free entry indicate that it a must for entrant firms to
incur costs during entry. A maximizing welfare number of firms do not
result from free entry. These findings
contribute significantly to economic literature as they reveal that economists
hold the hope that set-up costs would reduce thus effectively removing the entry regulations. These findings depict a connection with the already existing
literature that supports that as efficiency decreases
as free-entry equilibrium converges to a first-best
allocation.
A critical assessment on the journal article reveals that the authors’ utilized crucial assumptions in concluding their findings. The first assumption stipulates how the post-entry equilibrium aggregate increases as the number of...