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Cost‐Reducing Investment, Competition, and Industry Dynamics
Author(s) -
Petrakis Emmanuel,
Roy Santanu
Publication year - 1999
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00020
Subject(s) - investment (military) , competition (biology) , economics , marginal cost , microeconomics , ex ante , free entry , futures studies , industrial organization , monetary economics , ecology , macroeconomics , artificial intelligence , politics , political science , computer science , law , biology
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.