NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Chronic Excess Capacity in U.S. Industry

Robert E. Hall

NBER Working Paper No. 1973
Issued in July 1986
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w1973

Published: Published as "The Relation Between Price and Marginal Cost in U.S.Industry" , JPE, Vol. 96, no. 5 (1988): 921-947.

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