Journal Article ‘Free Entry and Social Inefficiency”

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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...