Empirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries. We propose a dynamic model of capacity accumulation that explains the observed facts. In our model, firms accumulate capacity over time and compete repeatedly in the product market. We assume that capacity is lumpy and that investment and depreciation are subject to idiosyncratic shocks. We highlight the mode of product market competition and the extent of investment reversibility as key determinants of the size distribution of firms in an industry. In particular, if firms compete in prices and the rate of depreciation is large, then the industry moves towards an outcome with one dominant firm and one small firm. Industry dynamics in this case resemble a rather brutal preemption race.
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