We characterize the dynamic equilibrium path of a competitive industry with free entry and exit, where atomistic firms undertake investment in order to reduce their future production cost. In each time period, current marginal cost is strictly increasing in current output. Investment reduces both total as well as marginal cost of production.
Active firms incur a fixed cost even if no output is produced.
Market demand is stationary over time. The industry equilibrium path is socially optimal. Equilibrium prices are decreasing over time. Firms invest in cost-reduction and earn negative profit when they are young. Mature firms, on the other hand, face prices above their minimum average cost, produce beyond their minimum efficient scale and earn strictly positive net profit.