Abstract: We build an industry equilibrium model with dynamic strategic competition to jointly explain the fluctuations in competition intensity, profitability, and asset prices. Product market competition endogenously intensifies as discount rates rise, because firms compete more aggressively for current cash flows by undercutting each other as the present value of future cooperation decreases. Competition intensity responds differently to aggregate discount-rate shocks across industries. In industries with a lower turnover rate of market leaders, firms’ profit margins tend to be higher yet more exposed to discount-rate fluctuations, thereby generating the gross profitability premium. We exploit exogenous variations in market structure — large tariff cuts — to test the model directly. Empirical evidence based on textual analysis also supports model implications.