High Cost to Initial Entrant and the Risk of Free Rider Producers

Next, we will consider the third generic type of market failure, or the inability for a market to form or sustain operation due to free riders, by looking at two causes of this kind of failure in this section and the next section. Although the sources are different, both involve a situation where some party benefits from the market exchange without incurring the same cost as other sellers or buyers.

New products and services are expensive for the first firm to bring them to market. There may be initial failures in the development of a commercial product that add to the cost. The firm will start very high on the learning curve because there is no other firm to copy or hire away ...

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