Intertemporal Dynamics of Cost Asymmetry

We study the intertemporal dynamics of asymmetric cost behavior in a competitive setting. Our analysis delves into the primitives of cost asymmetry and explores its dynamic evolution over time. The analysis yields the result that cost behavior is asymmetric by default and path‐dependent, transpiring as cost stickiness following prior resource expansion and taking the form of cost anti‐stickiness after previous resource contraction. The analysis further suggests that the magnitude of cost asymmetry, either stickiness or anti‐stickiness, is decreasing in demand uncertainty and competition intensity, increasing in adjustment costs and time discounting, and greater for small demand shocks than for large demand shocks. By highlighting cost asymmetry as a dynamic, rather than static, phenomenon, and by providing new, testable predictions regarding the direction and magnitude of cost asymmetry across firms and over time, our results offer theoretical grounding for the empirical cost asymmetry literature and may also help investors and other stakeholders interpret cost behavior in light of firms' recent history of expansion or contraction and their competitive environment.