The Size of Firms and R&D Investment
We construct an industry-equilibrium model in which it is costly for consumers who have previously purchased from one firm to switch to competitors. This gives firms a certain degree of market power over their established customers. The equilibria we identify under these conditions have the following properties: (1) there is a nontrivial size distribution of firms, although firms are intrinsically identical, (2) larger firms make higher profits, (3) larger firms spend more on R&D, (4) larger firms charge (on average) lower prices, and (5) profits are positively correlated over time. These properties match empirical regularities concerning the manufacturing and retail sectors in the U.S. economy. 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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Volume (Year): 40 (1999)
Issue (Month): 4 (November)
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