Entry and Exit of Firms

In industrial organization, the entry of firms refers to new businesses starting up and joining a market, typically when they see profit potential. Conversely, exit occurs when existing firms shut down or leave the market, often due to losses or unbearable competition. These processes affect market competition, pricing, and innovation. If many firms enter, competition increases, potentially lowering prices for consumers. If firms exit, competition decreases, which can lead to higher prices. Understanding these dynamics helps explain how markets evolve and respond to changes in demand, costs, and regulations.