Chronic Excess Capacity in U.S. Industry

Previous research has suggested that firms in a number of industries have considerable market power, in the sense that their prices exceed their marginal costs. However, the observed profits of those industries are not nearly as high as would occur under full exploitation of the market power with a constant returns technology. Rather, because of fixed costs associated with a minirnumn scale of operation or for other reasons, industry equilibriumn occurs at a point where no abnormal returns are earned, even though market power exists. This inference is supported by an empirical study that shows that most industries hold capital far beyond the point that would minimize cost given their actual output. In this sense, the industries have chronic excess capacity.