This paper provides a model of firm and industry dynamics that allows for entry,
exit, and firm-specific uncertainty generating variability in the fortunes of firms.
It focuses on the impact of uncertainty arising from investment in research and exploration.
It analyzes the behavior of individual firms in an evolving market place and derives
optimal policies, including exit. Then it adds an entry process and aggregates the
optimal behavior of all firms, including potential entrants, into a rational expectations
Markov-perfect industry equilibrium and proves ergodicity of the equilibrium process.
Numerical examples illustrate the detailed characteristics of the stochastic process
generating industry structures.