Competitive Profits in the Long Run

• Published in: The Review of economic studies Vol. 59; no. 1; pp. 125 - 142
• Main Author: Lambson, Val Eugene
• Format: Journal Article
• Language: English
• Published: Oxford, etc Wiley-Blackwell 01-01-1992; Review of Economic Studies Ltd
• Subjects: Cost efficiency; Cost of entry; Economic theory; Long run profit maximization; Market conditions; Markov processes; Profit planning; Scrap value; Stochastic processes; Sunk costs
• ISSN: 0034-6527; 1467-937X
• DOI: 10.2307/2297929

Profit rates differ across industries. Explanations have often relied on static models of imperfect competition. This paper develops a dynamic model of perfect competition to demonstrate that long-run average profit rates differ even across competitive industries when the effects of sunk costs on entry and exit are considered. The hypothesis that firms maximize their present expected values has few empirical implications for long-run average profit rates, but it does have implications for the behaviour of variables over time; for example, industries with high variability in the number of firms should exhibit low variability in firm values.