When free entry exists, the pure competition model suggests that
economic profit will always be equal to zero.  Do you agree or
disagree?  Why?

Hi bmur-ga,

Free entry means that any new firm is able to enter a market without
barriers of any sort. Consider the following example:

Some firm has created a new market by selling a new, innovative
product. They have quickly become very profitable - this entices other
firms to enter this market in an attempt to capture a portion of this
market share. As firms entering the market increase, the total size of
the market must be divided among an increasing number of firms. This
leave a smaller and smaller amount of profit for each firm. When so
many firms have entered the market that it is no longer profitable for
everyone, those that are losing money leave the market.
Theorectically, firms will continue to enter until the venture is no
longer - this results in an equilibrium where the number of firms will
be such that their aggregate profit is zero in the long run.

Real life is not quite so simple - firms are not going to blindly
enter a market without first assessing whether a market has a niche
for them to exist in, not simply whether or not the firms currently
within the market are profitable (regardless of the level of
profitability). Today's global market is focused more on product
differentiation rather than duplication. As a result, there are many
industries where a small number of firms hold virtually the entire
market (as would occur in an oligopoly). Since these firms hold
competitive advantage over this given product, potential firms
entering this market would be discouraged from entering (although
nothing would be technically holding them back) if they knew they
could not perform the same operation with equal or better efficiency.
Therefore, although there is no formal restriction from entering a
market, an intuitive businessperson would consider other factors aside
from whether or not each firm in the market is profitable!

I hope that helps - if you have a problem understanding any of the
information you can post a clarification.

Cheers!

answerguru-ga

Hello Answerguru;

Yes your answer does help.  No further clarification is necessary.  Thank you.