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The Oligopoly Lucas Tree

Author

Listed:
  • Winston Wei Dou
  • Yan Ji
  • Wei Wu

Abstract

This paper proposes a novel quantitative framework with endogenous strategic competition in heterogeneous concentrated industries. Oligopolies compete strategically for profit margins in repeated games, trading off the benefits of future cooperation against those of reaping higher short-run profits by undercutting their rivals. Cross-industry dispersions in market leadership persistence and cash flow loadings on expected growth, as primitive characteristics, simultaneously determine the relationships among profitability, book-to-market ratios, and systematic risk exposures, thereby quantitatively rationalizing the gross profitability and value premium across industries and, importantly, their interactions. Controlling for the book-to-market ratio (gross profitability) makes the gross profitability (value) premium more pronounced.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Winston Wei Dou & Yan Ji & Wei Wu, 2022. "The Oligopoly Lucas Tree," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3867-3921.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:8:p:3867-3921.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab120
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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