The Oligopoly Lucas Tree

59 Pages Posted: 26 May 2020 Last revised: 1 Jun 2021

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Wei Wu

Texas A&M University

Date Written: May 31, 2021


This paper proposes a novel quantitative framework with endogenous strategic competition in heterogeneous concentrated industries. Oligopolies compete strategically for profit margins in repeated games, trading off the benefits of future cooperation against those of reaping higher short-run profits by undercutting their rivals. Cross-industry dispersions in market leadership persistence and cash flow exposures to expected growth simultaneously determine the relationships among profitability, book-to-market ratios, and systematic risk exposures, thereby quantitatively rationalizing the gross profitability and value premium across industries and, importantly, their interactions --- controlling for the book-to-market ratio (gross profitability) makes the gross profitability (value) premium more pronounced.

Keywords: Endogenous competition, Strategic rivalry, Value premium, Gross profitability premium, External habit formation.

JEL Classification: G12, L13, O33, C73

Suggested Citation

Dou, Winston and Ji, Yan and Wu, Wei, The Oligopoly Lucas Tree (May 31, 2021). Available at SSRN: or

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Wei Wu

Texas A&M University ( email )

360M Wehner
College Station, TX 77843-4218
United States
979-862-8092 (Phone)

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