Competitive Profits in the Long Run

Profit rates differ across industries. Explanations have often relied on static models of imperfect competition. This paper develops a dynamic model of perfect competition to demon-strate that long-run average profit rates differ even across competitive industries when the effects of sunk costs on entry and exit are considered. The hypothesis that firms maximize their present expected values has few empirical implications for long-run average profit rates, but it does have implications for the behaviour of variables over time; for example, industries with high variability in the number of firms should exhibit low variability in firm values. 1