The theory of long-run competitive equilibrium (LRCE), first developed by Marshall in the 1890s, has had a profound influence on our understanding of competitive markets. While Marshall referred to the notion of a representative firm, the identity of this firm is generally unclear, as the theory has focused on the case where all firms in the industry are identical. Using Hopenhayn's (1992) model of competitive industry dynamics, we extend the theory of LRCE to the case of heterogeneous firms. We show that, under certain conditions, the (long-run) industry supply function with heterogeneous firms exists and can indeed be characterized as the solution to the minimization problem of a "representative" average cost function, as originally envisioned by Marshall. As an application of the importance of accounting for heterogeneity, we show that maximal surplus is not maximized in an LRCE and that the only way to approximate the maximal surplus with a linear tax is to tax all profits and subsidize all losses.
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