Industry Concentration and Markup : Implications for Asset Pricing

This paper studies how expected returns interact with product market competition. We present a model in which product market competition is jointly captured by the industry concentration and the average markup. We then provide empirical evidence consistent with three channels that explain the relation between expected returns and competition in our model: (i) Competition erodes markups, such that firms are more exposed to systematic risk; (ii) the threat of entry by new firms lowers their exposure to the systematic risk of incumbents; and (iii) higher industry aggregate risk represents a barrier to entry, such that riskier industries are more concentrated