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Cost-Reducing Investment, Competition, and Industry Dynamics

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  • Petrakis, Emmanuel
  • Roy, Santanu

Abstract

We demonstrate the possibility of shake-out of firms and emergence of interfirm 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 profits 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 profits. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Petrakis, Emmanuel & Roy, Santanu, 1999. "Cost-Reducing Investment, Competition, and Industry Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 381-401, May.
    • Handle: RePEc:ier:iecrev:v:40:y:1999:i:2:p:381-401
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    Cited by:

    1. Allanson, Paul & Montagna, Catia, 2005. "Multiproduct firms and market structure: An explorative application to the product life cycle," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 587-597, September.
    2. Meagher, Kieron J. & Wong, Arlene & Zauner, Klaus G., 2020. "A competitive analysis of fail fast: Shakeout and uncertainty about consumer tastes," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 589-600.
    3. Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February.
    4. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
    5. Gotz, Georg, 2002. "Sunk costs, windows of profit opportunities, and the dynamics of entry," International Journal of Industrial Organization, Elsevier, vol. 20(10), pages 1409-1436, December.
    6. Bester, Helmut & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2012. "Wage bargaining, productivity growth and long-run industry structure," Labour Economics, Elsevier, vol. 19(6), pages 923-930.
    7. Sengupta Aditi, 2010. "Environmental Regulation and Industry Dynamics," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-29, June.
    8. Bester, Helmut & Petrakis, Emmanuel, 2003. "Wages and productivity growth in a competitive industry," Journal of Economic Theory, Elsevier, vol. 109(1), pages 52-69, March.
    9. James Prieger, 2007. "The Impact of Cost Changes on Industry Entry and Exit," Journal of Economics, Springer, vol. 91(3), pages 211-243, July.
    10. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Trade and Industrial Policy of Transition Economies," CESifo Working Paper Series 446, CESifo.
    11. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings 144, Econometric Society.
    12. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.

    More about this item

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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