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Cost-Reducing Investment, Competition, and Industry Dynamics

  • Petrakis, Emmanuel
  • Roy, Santanu

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.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 40 (1999)
Issue (Month): 2 (May)
Pages: 381-401

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Handle: RePEc:ier:iecrev:v:40:y:1999:i:2:p:381-401
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  1. Boyan Jovanovic & Glenn MacDonald, 1993. "The Life-Cycle of a Competitive Industry," NBER Working Papers 4441, National Bureau of Economic Research, Inc.
  2. Emmanuel Petrakis & Eric Rasmusen & Santanu Roy, 1995. "The Learning Curve in a Competitive Industry," Industrial Organization 9506001, EconWPA.
  3. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
  4. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  5. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
  6. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-21, January.
  7. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  8. Pakes, A. & Ericson, R., 1990. "Empirical Implications Of Alternative Models Of Firm Dynamics," Papers 594, Yale - Economic Growth Center.
  9. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  10. Hopenhayn, Hugo A., 1992. "Exit, selection, and the value of firms," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 621-653.
  11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  12. Davis, Steven J & Haltiwanger, John C, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 819-63, August.
  13. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  14. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  15. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  16. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  17. repec:cup:cbooks:9780521265140 is not listed on IDEAS
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