In many industries, the entry of new firms increases market competition. Similarly, the exit of firms may decrease market competition. Although government trade, merger, and antitrust policies recognize the competitive consequences of entry and exit, not much evidence exists on their quantitative importance. Thus, while current merger policy implicitly presumes that competition prevails in markets with at least four to six equal-sized firms, not much is known about the consequences of allowing a merger that removes the second, third, or fourth firms from a market. Similar questions arise in policy debates about the effects of foreign competitors. This research will develop a framework for measuring the effect of entry and exit on market competition. Specifically, measures of the extent to which market competition departs from perfect competition will be developed. These measures take into account several practical problems that confront policy analysts, including the limited amount of information available on the incentives for firms to react to new entrants. These measures are also related to a variety of economic factors that affect firms' incentives to compete through entry and exit. In particular, it is recognize that large capital or research investments may be necessary to ensure successful entry. These methods will be used to study the competitiveness of a variety of retail markets and professional occupations and also the effects of mergers.
