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profit cycle

  A sectional approach to understanding changes experienced by regional economies, developed as an alternative to the product life cycle model. Instead of focusing on regularities in the changing scale of output or changes in the qualitative characteristics of a product and its production process over time, Markusen (1985) argues that the economic variable most crucial to determining industrial change is the rate of profit. Drawing her inspiration from Schumpeter and Marx, she asserts that change within an industry should be understood in terms of two central processes, each of which is pursued by firms to increase market power and, hence, profit rates: innovation and imperfect competition. She posits a five-stage model through which industries are argued to move.

In the stage where new industries are born and core products are being designed, \'zero profit\' best describes the state of the sector.

Once an innovation has proved to be commercially successful, and so long as its production is concentrated in the hands of a single (monopoly) firm, the industry will enjoy \'super profit\' levels.

As patents expire and/or imitation and innovation diffusion facilitates entry into the industry by new firms, the market power once held by the monopoly firm dissipates. Profit rates then decline to \'normal profit\' levels, as the industry moves towards market saturation. It is only at this stage that competitive conditions in the industry come to resemble perfect competition.

The fourth stage is the least determinate of the five. If a small number of firms are able to increase their market shares through mergers and acquisitions, this move toward oligopoly will raise profit rates to \'normal-plus\' levels. If, instead, the industry evolves along a path of predatory pricing and excessive competition, profit rates will be squeezed to \'normal-minus\' levels.

Finally, once the sector matures to a state of obsolescence, \'negative profit\' rates will ensue.

Moreover, Markusen argues that \'distinct spatial tendencies also accompany each stage of a sector\'s passage through the profit cycle\' (p. 24). Corresponding to the five stages described above are: concentration, agglomeration, dispersion, relocation and abandonment. (MSG)

Reference Markusen, A.R. 1985: Profit cycles, oligopoly, and regional development. Cambridge, MA: MIT Press.



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