The Oligopoly Lucas Tree
Review of Financial Studies, Forthcoming
76 Pages Posted: 26 May 2020 Last revised: 3 Nov 2021
Date Written: November 3, 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 loadings on expected growth, as primitive characteristics, 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: Suggested Citation