Cost Reducing Investment, Competition and Industry Dynamics
1998-02-09
Research Paper
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We demonstrate the possibility of shake-out of firms and emergence of inter-firm heterogeneity along the (socially optimal) dynamic equilibrium path of a competitive industry with free entry and exit, even when there is no uncertainty and all firms are ex ante identical with perfect foresight. Atomistic firms with upward sloping marginal cost curves undertake investment in firm- specific cost reduction. They earn negative net profit in early periods, compensated later by strictly positive net profits; no entry occurs after the initial time period. Some firms may exit before others even while other firms earn positive net profit.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- D41 : Perfect Competition
- L11 : Production, Pricing, and Market Structure; Size Distribution of Firms
- O31 : Innovation and Invention: Processes and Incentives
- D92 : Intertemporal Firm Choice and Growth, Investment, or Financing
Automatically Extracted Terms
- period
- industry
- investment
- equilibrium
- output
- price
- profit
- industry equilibrium
- period t
- entry
- cost reduction
- market
- model
- equilibrium path
- production
- demand
- curve
- assumption
- increase
- reduction
