Selection, Heterogeneity, and Entry in Liberal Professional Markets

We analyze two different cases of entry regulation in professional markets: first, when licensing is a requirement for becoming a professional (lawyers); second, when entry and price restrictions are applied on a geographical basis (pharmacists). Both cases are investigated within a circular model of localized competition and heterogeneous players. The analysis reveals that licensing introduces a selection mechanism which is effective in preventing entry of inefficient players in markets with large ex ante heterogeneity. Furthermore, because in the second case excessive entry is reduced as the degree of heterogeneity increases, our analysis lends support to a policy that simultaneously relaxes entry and price restrictions.