TY - JOUR

T1 - A Profit-Based View of Economic Granularity in the Perspective of Market Competition

AU - Forrest, Jeffrey Yi-Lin

AU - Wagner, Joachim

AU - Anderson, Melanie

AU - Lipinski, John

AU - Liu, Yong

AU - Tian , Xiaoguang

N1 - Copyright 2022 by the Pennsylvania Economic Association. Permission is granted to reproduce articles published in this journal, so long as reproduced copies are used for non-profit educational or research purposes. For other purposes, permission must be obtained fromthe Editor.

PY - 2022

Y1 - 2022

N2 - 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.

AB - 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.

KW - Economics

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M3 - Journal articles

VL - 29

SP - 92

EP - 115

JO - Pennsylvania Economic Review

JF - Pennsylvania Economic Review

SN - 1531-0949

IS - 1

ER -