The Decline of Dominant Firms, 1905-1929

Abstract

The theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share. We extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share. The model is applied to 42 once-dominant firms in U. S. manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905–1929. The statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing.

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