Chronic Excess Capacity in U.S. Industry
NBER Working Paper No. 1973
Previous research has suggested that firms in a number of industries
have considerable market power, in the sense that their prices exceed
their marginal costs. However, the observed profits of those industries
are not nearly as high as would occur under full exploitation of the market
power with a constant returns technology. Rather, because of fixed costs
associated with a minirnumn scale of operation or for other reasons,
industry equilibriumn occurs at a point where no abnormal returns are
earned, even though market power exists. This inference is supported by
an empirical study that shows that most industries hold capital far beyond
the point that would minimize cost given their actual output. In this
sense, the industries have chronic excess capacity.
Published: Published as "The Relation Between Price and Marginal Cost in U.S.Industry" , JPE, Vol. 96, no. 5 (1988): 921-947.