On Industry Structure and Firm Conduct in Long Run Equilibrium

Abstract

This paper presents an analysis of long run equilibrium of industry structure and firm conduct allowing for entry and exit, and cost heterogeneity among firms. It investigates the case of firms’ conduct/markups that emerges as the stationary equilibrium from long run evolutionary selection over time. Treating the number of firms as endogenous provides linkages between firms’ conduct and market structure. The implications of cost structure for market equilibrium price, firms' conduct and industry concentration are investigated. The effects of fixed cost and entry/exit on long run industry equilibrium are examined. The analysis shows how globalization can help reduce the firms’ exercise of market power, increase the responsiveness of aggregate supply, and reduce price sensitivity to shocks. It also shows how neglecting either entry/exit or adjustments in firm conduct underestimates the aggregate effects of globalization.