The Durability of Information, Market Efficiency and the Size of Firms

Abstract

The authors analyze a search-theoretic framework in which consumers buy the product repeatedly and firms' costs vary over time. They show the cross-sectional correlation between profits and firm size, the persistence of profits over time, and the role of consumers' immobility in determining firms' profits. In contrast with previous explanations of these phenomena, which are based on differences in inherent productive efficiencies, firms in the authors' model have the same efficiencies but some firms are more successful ex post which affects their subsequent (pricing) behavior and enables them to sustain their privileged position. In particular, large and more profitable firms raise their prices more moderately when their costs increase. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.