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Capital Depreciation And Industry Competition: Evidence And Theory

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  • Alicia H. Dang
  • Roberto M. Samaniego

Abstract

We argue that the rate of capital depreciation is a determinant of competition. We show that the rate of capital depreciation has a robust positive relationship with market power in U.S. data. Then, we develop a general equilibrium model of industry competition where industries vary in their rate of capital depreciation. In equilibrium, optimal savings decisions imply that rapid depreciation is related to higher costs of capital, so that industries with rapid depreciation display less competition than industries with slow depreciation. Depending on parameters, the calibrated model can account for much of the observed dispersion in markups across U.S. industries.

Suggested Citation

  • Alicia H. Dang & Roberto M. Samaniego, 2024. "Capital Depreciation And Industry Competition: Evidence And Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 1081-1102, May.
    • Handle: RePEc:wly:iecrev:v:65:y:2024:i:2:p:1081-1102
    DOI: 10.1111/iere.12683
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    References listed on IDEAS

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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
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