Business Economics and Public Policy Papers

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Journal Article

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RAND Journal of Economics





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Empirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries. We propose a dynamic model of capacity accumulation that is consistent with the observed facts. The model highlights the mode of product market competition and the extent of investment reversibility as key determinants of the size distribution of firms in an industry. In particular, if firms compete in prices and the rate of depreciation is large, then the industry moves toward an outcome with one dominant firm and one small firm. Industry dynamics in this case resemble a preemption race. Contrary to the usual intuition, this preemption race becomes more brutal as investment becomes more reversible.

Copyright/Permission Statement

This is the peer reviewed version of the following article: David Besanko, Ulrich Doraszelski (2004), Capacity Dynamics and Endogenous Asymmetries in Firm Size, RAND Journal of Economics, 35 (1), 23 - 49, which has been published in final form at . This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving:

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Economics Commons



Date Posted: 27 November 2017

This document has been peer reviewed.