Chronic Excess Capacity in U.S. Industry

Previous research has suggested that firms in a number of industrieshave considerable market power, in the sense that their prices exceedtheir marginal costs. However, the observed profits of those industriesare not nearly as high as would occur under full exploitation of the marketpower with a constant returns technology. Rather, because of fixed costsassociated with a minirnumn scale of operation or for other reasons,industry equilibriumn occurs at a point where no abnormal returns areearned, even though market power exists. This inference is supported byan empirical study that shows that most industries hold capital far beyondthe point that would minimize cost given their actual output. In thissense, the industries have chronic excess capacity