Abstract
This paper introduces a new theory explaining entry and exit rates. According to our model emphasizing the carrying capacity of a market, net entry is a reaction to a disequilibrium situation. This is a situation in which the number of firms in the market is unequal to the carrying capacity of that market. We derive an expression for the carrying capacity and also some testable implications. We investigate the speed of adjustment towards equilibrium, the effect of changes in consumer demand on the carrying capacity and the relative importance of entry and exit in the adjustment process. The theoretical model is tested using a panel data set of 22 retail industries for the 1981–1988 period.
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