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Entry Dynamics: Theory and Implications

In: Dynamics of Entry and Market Evolution

Author

Listed:
  • Jati Sengupta

    (University of California)

Abstract

Entry and exit behavior of firms tends to determine the pattern of industry evolution. Industries grow when new firms enter the industry; they decline when the incumbent firms exit. The entry process necessarily involves competition between the incumbent and the new entrants. Models of perfect competition where firms are price takers, assume that entry and exit are more or less costless and under conditions of free flow of market information this yields an industry equilibrium. The Walrasian model of competitive equilibrium introduces two types of adjustments: price—cost adjustment and demand—supply adjustment. First, if price exceeds marginal cost where the latter could be viewed as minimal average cost, the profitability continues and this provides incentives for new firms to enter the market till the excess profits are eliminated by new entry. Secondly, if excess demand persists and the capacity ceiling is hit, prices tend to rise thus causing profits to rise. This again provides incentives for new entry or the expansion of output by the existing incumbents.

Suggested Citation

  • Jati Sengupta, 2007. "Entry Dynamics: Theory and Implications," Palgrave Macmillan Books, in: Dynamics of Entry and Market Evolution, chapter 1, pages 1-23, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-21101-8_1
    DOI: 10.1057/9780230211018_1
    as

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