A Profit-Based View of Economic Granularity in the Perspective of Market Competition

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  • Jeffrey Yi-Lin Forrest
  • Joachim Wagner
  • Melanie Anderson
  • John Lipinski
  • Yong Liu
  • Xiaoguang Tian
This paper studies Gabaix’s granular hypothesis from an analytical angle in lights of profits and market competition. By establishing the profit pictures of the initial firms ofan emerging market and the incumbent firms of a maturing market, it is shown that consumers’ evolving preference help intensify market competition and encourage new firms’ entry into an established oligopoly market, if the market is perfectly competitive. With this profit-based logic in place, among other results established are precise conditions under which Gabaix’s granular hypothesis is either surely true or definitely not true. And to confirm the real-life applicability of what are analytically derived in this paper, an empirical exercise is performed by using new and yet unreleased data on the top 100 companies in Germany, prepared by the German Monopolies Commission. A robustness test indicates that the German economy is not a granular economy at least for the time period from 1976 to 2016. Different from the literature, this work presents a general picture of industrial developmentin terms of the evolution of profits, and fills a gap that exists in the hugeliterature of market competition. In termsof Gabaix’s granular hypothesis, this paper derives results on when the granular hypothesis holds true in general without suffering from any of the data-and anecdote-related constraints. At the end, several important open questions are posed for future research.
Original languageEnglish
JournalPennsylvania Economic Review
Issue number1
Pages (from-to)92 - 115
Number of pages24
Publication statusPublished - 2022

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