The durability of information, market efficiency and the size of firms

This paper analyzes a search-theoretic framework in which consumers buy the product repeatedly and firms' costs vary over time. 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 are illustrated. In contrast with previous explanations of these phenomena, which are based on differences in inherent productive efficiencies, firms in the 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. -Authors