The Industry Supply Function and the Long-Run Competitive Equilibrium with Heterogeneous Firms

TL;DR

This paper extends the theory of long-run competitive equilibrium to include heterogeneous firms, showing that the industry supply function can be derived from a representative average cost minimization, clarifying the role of firm heterogeneity.

Contribution

It introduces a framework incorporating firm heterogeneity into LRCE theory, linking supply to a representative average cost function.

Findings

Long-run supply function characterized by average cost minimization.

Heterogeneity among firms is integrated into the LRCE framework.

Theoretical clarification of the representative firm's role in heterogeneous industries.

Abstract

In developing the theory of long-run competitive equilibrium (LRCE), Marshall (1890) used the notion of a representative firm. The identity of this firm, however, remained unclear. Subsequent theory either focused on the case where all firms are identical or else incorporated heterogeneity but disregarded the notion of a representative firm. Using Hopenhayn's (1992) model of competitive industry dynamics, we extend the theory of LRCE to account for heterogeneous firms and show that the long-run supply function can indeed be characterized as the solution to the minimization of a representative average cost function.