Competitive Industry Dynamics with Constant Costs

This paper integrates investment and production decisions in a dynamic model of a competitive industry where producers, facing a technology involving fixed input–output coefficients, employ quantity adjustment rules. Whether complex dynamic price behaviour is consistent with producers breaking‐even over time is explored. The proportion of costs which are sunk through investment is shown to have a potentially dramatic impact on the price dynamics. The implications of an alternative hypothesis— that producers ‘normally’ use their avail able capacities and only do otherwise if events are sufficiently dramatic—are explored