The size of firms and R&D investment

We construct an industry-equilibrium model in which it is costly for consum ers who have previously purchased from one firm to switch to competitors. T his gives firms a certain degree of market power over their established cus tomers. The equilibria we identify under these conditions have the followin g properties: (1) there is a nontrivial size distribution of firms, althoug h firms are intrinsically identical, (2) larger firms make higher profits, (3) larger firms spend more on R&D, (4) larger firms charge ton average) lo wer prices, and (5) profits are positively correlated over time. These prop erties match empirical regularities concerning the manufacturing and retail sectors in the U.S. economy.