In the preceding chapters, the numbers and identities of the firms participating in the market are given. In this chapter, attention is turned to changes in the composition of firms selling in a new market, that is, to entry and exit. Obviously, firms enter new markets if they anticipate profits, but that leaves several questions to be answered: Will firms enter an industry whenever the previously established firms are making positive profits? If a firm would have made a profit if it had been previously established, will it necessarily decide to enter? Can established firms pursue policies that deter or prevent the entry of new firms? Are they better off pursuing such policies? Somewhat similar questions can be asked about the exit of firms: Can a firm be driven out of a market? Under what conditions will it be in the interest of the remaining firms to drive a rival firm out?

The study of entry has been done in several ways. Most familiar is what can be called static entry. The approach in static entry is to use a static, or one-period, model in which the number of firms in the market is a variable and examine market equilibrium as a function of the number of firms. Say that n* is the largest number of firms that can be in the market with nonnegative profits and that for any n < n*, all firms have positive profits.