Working Paper: NBER ID: w1973
Authors: Robert E. Hall
Abstract: Previous research has suggested that firms in a number of industries \nhave considerable market power, in the sense that their prices exceed \ntheir marginal costs. However, the observed profits of those industries \nare not nearly as high as would occur under full exploitation of the market \npower with a constant returns technology. Rather, because of fixed costs \nassociated with a minirnumn scale of operation or for other reasons, \nindustry equilibriumn occurs at a point where no abnormal returns are \nearned, even though market power exists. This inference is supported by \nan empirical study that shows that most industries hold capital far beyond \nthe point that would minimize cost given their actual output. In this \nsense, the industries have chronic excess capacity.
Keywords: excess capacity; market power; cost minimization; U.S. industries
JEL Codes: L11; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excess capacity (D24) | firms not minimizing expected costs (D21) |
| marginal benefit of capital (E22) | capital stocks (E22) |
| market power (L11) | chronic excess capacity (D25) |
| fixed costs (D24) | capacity utilization (E23) |
| change in real GNP (E20) | productivity disturbances (O49) |