Technological Change, Entry, and Stock-Market Dynamics: An Analysis of Transition in a Monopolistic Industry

Bipasa Datta, Huw Dixon
2002 The American Economic Review  
We consider the share-price dynamics induced by changes in technological progress (perhaps due to the introduction of a new technology or institutional reforms) and the resultant entry of firms. The focus is not so much in comparing the steady states before or after the change, but rather on the transitional dynamics of the industry or economy as it adjusts. The model is one with efficient markets and perfect foresight where fundamentals drive the stockmarket value. Should we expect
more » ... expect technological progress to lead only to increases in the level of the stockmarket (monotonic dynamics), or should we expect nonmonotonic behavior of boom followed by partial bust (a U-shaped or overshooting dynamic)? Is it possible to have share values falling even when the underlying technology is improving? We model a stylized monopolistic industry or economy in a continuous-time generalequilibrium setting with no uncertainty and perfect foresight. We adopt a model of entry found in Sanghamitra Das and Satya P. Das (1997), Datta and Dixon (2000), and Marta Aloi and Dixon (2001), in which the cost of entry is increasing in the flow of entry (due to some congestion effect or other externality). The flow of entry is determined by an intertemporal arbitrage condition that equates the cost of entry with the present value of incumbency. This gives rise to a dynamic zero-profit condition: the present value of incumbents in each instant is equal to the cost of entry. We first consider the case of a step increase in the level of technology with no other underlying growth. When an unanticipated technological improvement occurs, it causes a
doi:10.1257/000282802320189311 fatcat:pcgqyurru5fkvnkexr4j7hwemy