Competitive Profits in the Long Run

Val E. Lambson

63 citations0/0 files storedThe Review of Economic Studies

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Merger and Competition Analysis Firm Innovation and Growth Economic theories and models

Abstract

Profit rates differ across industries. Explanations have often relied on static models of imperfect competition. This paper develops a dynamic model of perfect competition to demonstrate that long-run average profit rates differ even across competitive industries when the effects of sunk costs on entry and exit are considered. The hypothesis that firms maximize their present expected values has few empirical implications for long-run average profit rates, but it does have implications for the behaviour of variables over time; for example, industries with high variability in the number of firms should exhibit low variability in firm values.

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1982Selection and the Evolution of Industry 1989Entry and Exit Decisions under Uncertainty 1984Do Markets Differ Much 1989Hysteresis, Import Penetration, and Exchange Rate Pass-Through 1986Profits in the Long Run 1991Industry evolution with sunk costs and uncertain market conditions 1989Empirical Implications of Alternative Models of Firm Dynamics

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1997PRODUCER TURNOVER AND PRODUCTIVITY GROWTH IN DEVELOPING COUNTRIES 2003Consumer inertia, firm growth and industry dynamics

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