Free Entry and Exit
All perfectly competitive industries have many firms with small market shares, pro-
ducing a standardized product. Most perfectly competitive industries are also char-
acterized by one more feature: it is easy for new firms to enter the industry or for
firms that are currently in the industry to leave. That is, no obstacles in the form of
government regulations or limited access to key resources prevent new firms from
entering the market. And no additional costs are associated with shutting down a
company and leaving the industry. Economists refer to the arrival of new firms into
an industry as entry;they refer to the departure of firms from an industry as exit.
When there are no obstacles to entry into or exit from an industry, we say that the in-
dustry has free entry and exit.
Free entry and exit is not strictly necessary for perfect competition. However, it en-
sures that the number of firms in an industry can adjust to changing market condi-
tions. And, in particular, it ensures that firms in an industry cannot act to keep other
firms out.
To sum up, then, perfect competition depends on two necessary conditions. First,
the industry must contain many firms, each having a small market share. Second, the
industry must produce a standardized product. In addition, perfectly competitive in-
dustries are normally characterized by free entry and exit.Monopoly
The De Beers monopoly of South Africa was created in the 1880s by Cecil
Rhodes, a British businessman. By 1880, mines in South Africa already
dominated the world’s supply of diamonds. There were, however, many min-
ing companies, all competing with each other. During the 1880s Rhodes bought
the great majority of those mines and consolidated them into a single
company, De Beers. By 1889, De Beers controlled almost all of the world’s dia-
mond production.
De Beers, in other words, became a monopolist. But what does it mean to be a
monopolist? And what do monopolists do?570 section 10 Behind the Supply Curve: Profit, Production, and Costs
What’s a Standardized Product?
A perfectly competitive industry must produce a
standardized product. But is it enough for the
products of different firms actually to be the
same? No: people must also thinkthat they are
the same. And producers often go to great
lengths to convince consumers that they have a
distinctive, or differentiated,product, even when
they don’t.
Consider, for example, champagne—not
the super-expensive premium champagnes,
but the more ordinary stuff. Most people
cannot tell the difference between cham-
pagne actually produced in the Champagneregion of France, where the product origi-
nated, and similar products from Spain
or California. But the French government
has sought and obtained legal protection
for the winemakers of Champagne, ensuring
that around the world only bubbly wine
from that region can be called champagne.
If it’s from someplace else, all the seller
can do is say that it was produced using
theméthode Champenoise.This creates
a differentiation in the minds of consumers
and lets the champagne producers of
Champagne charge higher prices.Similarly, Korean producers of kimchi,the
spicy fermented cabbage that is the Korean na-
tional side dish, are doing their best to convince
consumers that the same product packaged by
Japanese firms is just not the real thing. The
purpose is, of course, to ensure higher prices
for Korean kimchi.
So is an industry perfectly competitive if it
sells products that are indistinguishable except
in name but that consumers, for whatever rea-
son, don’t think are standardized? No. When it
comes to defining the nature of competition, the
consumer is always right.fyi
Paul Katz/Digital Vision/Getty ImagesAn industry has free entry and exit
when new firms can easily enter into the
industry and existing firms can easily leave
the industry.