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Measuring the Importance of Sunk Costs

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  • Timothy F. BRESNAHAN
  • Peter C.REISS

Abstract

This paper devises new methods for measuring firms' sunk costs and their effect on market structure. It builds on our earlier work that estimated the size of unobserved fixed costs from entry thresholds, the amount of market demand necessary to support a new entrant. Here we show that differences between entry and exit thresholds provide information about the extent of sunk costs and their option value. The latter half of the paper uses panel data on the location of rural dentists' practices to estimate entry and exit thresholds. We find dentists' exit thresholds are well below their entry thresholds. It thus appears dentists sink significant costs. A simulation suggests that dentists in large rural markets incur greater sunk costs than those in small markets.

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Bibliographic Info

Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (1994)
Issue (Month): 34 ()
Pages: 181-217

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Handle: RePEc:adr:anecst:y:1994:i:34:p:07

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Cited by:
  1. Van Cayseele, Patrick & Vanormelingen, Stijn, 2009. "Prices and Network Eects in Two-Sided Markets: the Belgian Newspaper Industry," Working Papers 2009/06, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  2. Toivanen, Otto & Waterson, Michael, 2011. "Retail Chain Expansion: The Early Years of McDonalds in Great Britain," CEPR Discussion Papers 8534, C.E.P.R. Discussion Papers.
  3. Roberts, M. & Tybout, J., 1993. "An Empirical Model of Sunk Costs and the Decision to Export," Papers 4-93-3, Pennsylvania State - Department of Economics.
  4. Nishida, Mitsukuni & Gil, Ricard, 2014. "Regulation, enforcement, and entry: Evidence from the Spanish local TV industry," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 11-23.
  5. Allan Collard-Wexler, 2006. "Plant Turnover and Demand Fluctuations in the Ready-Mix Concrete Industry," Working Papers 06-08, Center for Economic Studies, U.S. Census Bureau.
  6. Maarten Dossche & Freddy Heylen & Dirk Van den Poel, 2010. "The Kinked Demand Curve and Price Rigidity: Evidence from Scanner Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 723-752, December.
  7. Victor Aguirregabiria & Junichi Suzuki, 2013. "Identification and Counterfactuals in Dynamic Models of Market Entry and Exit," Working Papers tecipa-475, University of Toronto, Department of Economics.
  8. Goolsbee Austan, 2006. "The Value of Broadband and the Deadweight Loss of Taxing New Technology," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-31, April.
  9. Cotterill, Ronald W. & Egan, Leonard & Buckhold, William, 1998. "Beyond Illinois Brick: The Law and Economics of Cost Pass-Through in the ADM Price Fixing Case," Research Reports 25205, University of Connecticut, Food Marketing Policy Center.

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