Final answer:
New entrants are more likely when an industry experiences increased profits, signaling opportunities for return on investment. Established companies may respond with aggressive pricing to deter new competitors.
Step-by-step explanation:
New entrants to an industry are more likely when there are increased industry profits. In a competitive market, these profits act as a signal that attracts new firms because they see an opportunity to earn a return on their investments. The process of new firms starting production in response to this opportunity is known as entry. This scenario occurs across various industries, whether it's a new airline entering a busy route to compete with established carriers, or new gas stations and restaurants opening up to capitalize on unmet consumer needs or to offer unique products and services.
However, the threat of new entrants can lead to established businesses engaging in competitive strategies such as price slashing, to deter new competitors. Over time, if new entrants are unable to sustain their business due to aggressive pricing from existing companies, they may exit the market, allowing the incumbent firms to raise prices again once the threat has subsided. Thus, industry dynamics are constantly changing with the ebb and flow of new business entry and exit.