IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/19980011.html
   My bibliography  Save this paper

Cost Reducing Investment, Competition and Industry Dynamics

Author

Listed:
  • Emmanuel Petrakis

    (Universidad Carlos III de Madrid)

  • Santanu Roy

    (Erasmus University)

Abstract

We demonstrate the possibility of shake-out of firms and emergence of inter-firmheterogeneity along the (socially optimal) dynamic equilibrium path of a competitive industry with freeentry and exit, even when there is no uncertainty and all firms are ex ante identical with perfectforesight. Atomistic firms with upward sloping marginal cost curves undertake investment in firm-specific cost reduction. They earn negative net profit in early periods, compensated later by strictlypositive net profits; no entry occurs after the initial time period. Some firms may exit before others evenwhile other firms earn positive net profit.

Suggested Citation

  • Emmanuel Petrakis & Santanu Roy, 1998. "Cost Reducing Investment, Competition and Industry Dynamics," Tinbergen Institute Discussion Papers 98-011/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:19980011
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/98011.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
    2. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-347, April.
    3. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    4. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    5. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
    6. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702, September.
    7. Emmanuel Petrakis & Eric Rasmusen & Santanu Roy, 1997. "The Learning Curve in a Competitive Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 248-268, Summer.
    8. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
    9. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    10. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    11. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-653, September.
    12. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    14. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 671-698.
    15. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    16. Hopenhayn, Hugo A., 1992. "Exit, selection, and the value of firms," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 621-653.
    17. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Allanson, Paul & Montagna, Catia, 2005. "Multiproduct firms and market structure: An explorative application to the product life cycle," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 587-597, September.
    2. Gotz, Georg, 2002. "Sunk costs, windows of profit opportunities, and the dynamics of entry," International Journal of Industrial Organization, Elsevier, vol. 20(10), pages 1409-1436, December.
    3. Bester, Helmut & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2012. "Wage bargaining, productivity growth and long-run industry structure," Labour Economics, Elsevier, vol. 19(6), pages 923-930.
    4. Sengupta Aditi, 2010. "Environmental Regulation and Industry Dynamics," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-29, June.
    5. Bester, Helmut & Petrakis, Emmanuel, 2003. "Wages and productivity growth in a competitive industry," Journal of Economic Theory, Elsevier, vol. 109(1), pages 52-69, March.
    6. José Luis Moraga Gonzales & Jean-Marie Viaene, 2001. "Trade and Industrial Policy of Transition Economies," CESifo Working Paper Series 446, CESifo.
    7. Meagher, Kieron J. & Wong, Arlene & Zauner, Klaus G., 2020. "A competitive analysis of fail fast: Shakeout and uncertainty about consumer tastes," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 589-600.
    8. Moraga-Gonzalez, Jose Luis & Viaene, Jean-Marie, 2005. "Trade policy and quality leadership in transition economies," European Economic Review, Elsevier, vol. 49(2), pages 359-385, February.
    9. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
    10. James Prieger, 2007. "The Impact of Cost Changes on Industry Entry and Exit," Journal of Economics, Springer, vol. 91(3), pages 211-243, July.
    11. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings 144, Econometric Society.
    12. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings 144, Econometric Society.
    2. Bester, Helmut & Petrakis, Emmanuel, 2003. "Wages and productivity growth in a competitive industry," Journal of Economic Theory, Elsevier, vol. 109(1), pages 52-69, March.
    3. James Bergin & Dan Bernhardt, 2008. "Industry dynamics with stochastic demand," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 41-68, March.
    4. Guidi, Francesco & Solomon, Edna & Trushin, Eshref & Ugur, Mehmet, 2015. "Inverted-U relationship between innovation and survival: Evidence from firm-level UK data," EconStor Preprints 110896, ZBW - Leibniz Information Centre for Economics.
    5. Jaap H. Abbring & Jeffrey R. Campbell, 2003. "A Structural Empirical Model of Firm Growth, Learning, and Survival," NBER Working Papers 9712, National Bureau of Economic Research, Inc.
    6. Zoltán J. Ács & Pamela Mueller, 2015. "Employment effects of business dynamics: Mice, Gazelles and Elephants," Chapters, in: Global Entrepreneurship, Institutions and Incentives, chapter 16, pages 304-319, Edward Elgar Publishing.
    7. Raquel Ortega-Argilés & Rosina Moreno, 2005. "Firm Competitive Strategies And The Likelihood Of Survival - The Spanish Case," ERSA conference papers ersa05p347, European Regional Science Association.
    8. Fishman, Arthur & Rob, Rafael, 2003. "Consumer inertia, firm growth and industry dynamics," Journal of Economic Theory, Elsevier, vol. 109(1), pages 24-38, March.
    9. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
    10. Flora Bellone & Patrick Musso & Michel Quéré & Lionel Nesta, 2006. "Productivity and Market Selection of French Manufacturing Firms in the Nineties," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 319-349.
    11. Laincz, Christopher A., 2005. "Market structure and endogenous productivity growth: how do R&D subsidies affect market structure?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 187-223, January.
    12. Roman Fossati, 2011. "Outsourcing versus Vertical Integration: A Dynamic Model of Industry Equilibrium," 2011 Meeting Papers 1421, Society for Economic Dynamics.
    13. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
    14. Jaap H. Abbring & Jeffrey R. Campbell, 2005. "A Firm's First Year," Tinbergen Institute Discussion Papers 05-046/3, Tinbergen Institute.
    15. Sengupta Aditi, 2010. "Environmental Regulation and Industry Dynamics," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-29, June.
    16. Hugo A. Hopenhayn, 2011. "Firm Microstructure and Aggregate Productivity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 111-145, August.
    17. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.
    18. Bester, Helmut & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2012. "Wage bargaining, productivity growth and long-run industry structure," Labour Economics, Elsevier, vol. 19(6), pages 923-930.
    19. Mohammad Jamali & Hatra Voghouei & Nor Md Nor, 2014. "Information technology and survival of firms," Netnomics, Springer, vol. 15(2), pages 107-119, September.
    20. Robert Petrunia, 2007. "Persistence of initial debt in the long-term employment dynamics of new firms," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 861-880, August.

    More about this item

    Keywords

    Cost Reducing Investment; Industry Dynamics; Learning; Competitive Equilibrium; Shake Out;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:19980011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tinbergen Office +31 (0)10-4088900 (email available below). General contact details of provider: https://edirc.repec.org/data/tinbenl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.