A Study On The Regulation Of Entry

Governments usually put some restrictions on firms' entry to a market, whether a purely natural monopoly or a structural competitive market. Entry regulation includes two basic cases, the case that governments directly restrict or sometimes even forbid certain firms or persons entering a market, and the case that governments require firms and persons to have some qualifications for entering. The former is known as direct entry regulation, which means that regulators directly determine number of firms in an industry. The latter is known as indirect entry regulation, through which regulators indirectly influence the number of firms in an industry using some policies such as minimum capital requirements, quality and security requirements in production, etc.This dissertation will probe into direct entry regulation and indirect entry regulation in the context of bounded rationality and information asymmetry respectively. The standing point of the dissertation is that welfare effects of these two kinds of regulations should be distinguished. Firstly, it is impossible to solve excessive entry problem by applying direct entry regulation. On the contrary, it is harmful to social efficiency. Since entry is guided by firms' bounded rationality, firms do not strictly base their entry decisions on rational principles, which require non-negative NPV. Moreover, firms may produce some systematically cognitive biases in making entry decisions. It is inevitable that the limitation and biases cause excessive entry in the terms of neo-classical economics. On the other hand, regulators themselves are neither omniscient nor omnipotent. So they cannot keep themselves from biases as well. It is not realistic to expect regulators to achieve maximization of social welfare by setting number of firms or persons entering into a market. What's more, this kind of regulation gives regulators too much power, which may be used by regulators to explore benefit for their own, and do harm to competition and innovation instead. Therefore, direct entry regulation is not a recommended practice. Secondly, appropriate indirect regulation of entry has signaling effect, which contributes to alleviating information asymmetry. The indirect regulation of market entry plays an active role in building a credit system of the whole market. Meanwhile, firms can get information about the strengths, abilities, qualities of other players through information channel of indirect entry regulation. To some degree, the indirect regulation of entry replaces part of the course of basic credit built by firms, which contributes to the reduction of transaction cost.This dissertation consists of seven chapters. Chapter 1 introduces starting points, methodologies and structure of the dissertation. It also provides a brief literature review of both domestic and international researches, which cover the reason of market entry regulation, incentive regulation of entry, and the effects of the entry regulation on economic growth, social efficiencies and corruption.Following two theories on regulation of entry, the public interests approach of regulation and the special interests of regulation, Chapter 2 reviews the hypothesis of "the helping hand" through the theory of excessive entry, unsustainable natural monopoly and asymmetric information. Then the chapter discusses the hypothesisof "the capturing hand" on entry regulation, which means regulators are captured by the incumbents and regulators create rent through entry regulation. This chapter attempts to clarify the major theories on entry regulation so as to form a comprehensive and systematic framework.Based on the foundations, objectives, forms and methods of direct entry regulation in practice, Chapter 3 applies the theory of bounded rationality and cognitive biases in behavioral economics to analyze tendencies of excessive entry resulted from bounded rationality definitely, relationships among bounded rationality, competition and innovation, regulators' impossibility of completing the target of regulation. This chapter demonstrates that excessive entry is unavoidable in the world of uncertainty. It is an unrealistic illusion of neo-classical economics that direct entry regulation can be used to reduce the potential negative effect of excessive entry on social welfare. Therefore, we should be aware of serious consequences as the result of friendly suggestions of direct regulation of entry both in theories and practice.Chapter 4 differentiates indirect entry regulation from direct entry regulation. The chapter explores active roles of indirect entry regulation from the perspectives that indirect entry regulation promotes credit mechanisms of the whole market as well as helps firms build up their basic credit. Based on a model of substitution of regulation for credit, a simple mathematical analysis shows that appropriate indirect entry regulation is mainly decided by marginal revenue of regulation and demand price elasticity of regulated products or services. In practice, the most appropriate level of indirect entry regulation can be determined by such methodologies as Empirical Estimate, Engineering Approach and Survivor Test.As an empirical test of the theories mentioned in previous three chapters, Chapter 5 provides detailed analyses of histories and effectiveness of indirect entry regulation in taxi, telecommunication and professional services. It is found that economic efficiency is not a dominant or sole factor that decides entry regulation in these three industries. The origin of entry regulation in these industries is very complicated. Some people are in favor of entry regulation but more people doubt or even deny its effectiveness, which are distinctly different from current simplified theories of entry regulation.Chapter 6 presents a general analysis on reforms of entry regulation in transitional economies, especially in China. According to the analysis, the reform of entry regulation should follow four principles: (1) value dynamics of the evolution of entry regulation during different developing periods of an industry, (2) value short-term effects of the reform, (3) weigh and compensate losses caused by policy changes, and (4) help entrants. This chapter points out that valid property right protection and strong constitutional restrictions are necessary in smoothly carrying out the reform of entry regulation. Finally, trends and focuses of the reform of entry regulation under economic globalization are also discussed in this chapter.Chapter 7 summarizes the thoughts and conclusions of this dissertation, and points out limitations and some issues which can be further researched in the future.