The size of firms and R&D investment

We construct an industry-equilibrium model in which it is costly for consumers who have previously purchased from one firm to switch to competitors. This gives firms a certain degree of market power over their established customers. The equilibria we identify under these conditions have the following properties: (1) there is a nontrivial size distribution of firms, although firms are intrinsically identical, (2) larger firms make higher profits, (3) larger firms spend more on R&D, (4) larger firms charge (on average) lower prices, and (5) profits are positively correlated over time. These properties match empirical regularities concerning the manufacturing and retail sectors in the U.S. economy.