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The Industry Supply Function and the Long-Run Competitive Equilibrium with Heterogeneous Firms

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Listed:
  • Ignacio Esponda
  • Demian Pouzo

Abstract

In developing the theory of long-run competitive equilibrium (LRCE), Marshall (1890) used the notion of a representative firm. The identity of this firm, however, remained unclear. Subsequent theory either focused on the case where all firms are identical or else incorporated heterogeneity but disregarded the notion of a representative firm. Using Hopenhayn's (1992) model of competitive industry dynamics, we extend the theory of LRCE to account for heterogeneous firms and show that the long-run supply function can indeed be characterized as the solution to the minimization of a representative average cost function.

Suggested Citation

  • Ignacio Esponda & Demian Pouzo, 2016. "The Industry Supply Function and the Long-Run Competitive Equilibrium with Heterogeneous Firms," Papers 1612.09549, arXiv.org, revised Sep 2019.
    • Handle: RePEc:arx:papers:1612.09549
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
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    6. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    8. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    9. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75(4), pages 321-321.
    10. Chetty, V. K. & Heckman, J. J., 1986. "A dynamic model of aggregate output supply, factor demand and entry and exit for a competitive industry with heterogeneous plants," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 237-262.
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    Cited by:

    1. Enrico De Monte, 2020. "Entry, Exit and Productivity: Evidence from French Manufacturing Firms," Working Papers of BETA 2020-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. De Monte Enrico, 2024. "Nonparametric Instrumental Regression with Two-Way Fixed Effects," Journal of Econometric Methods, De Gruyter, vol. 13(1), pages 49-66, January.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition

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