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Sunk Costs, Contestability, and the Latent Contract Market

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  • Christodoulos Stefanadis

Abstract

The idea that an industry with sunk costs may be contestable even in the absence of long‐term contracts has received little attention informal economic theory yet is sometimes popular among practitioners. This paper formally illustrates the argument. In an infinitely repeated game, there exists a class of contestable outcomes in which the monopolist sells only on the spot market and charges low prices along the equilibrium path to prevent customers from resorting to long‐term contracts. The crucial test for contestability is the level of transaction costs in the latent contract market.

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  • Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, March.
    • Handle: RePEc:bla:jemstr:v:12:y:2003:i:1:p:119-138
    DOI: 10.1111/j.1430-9134.2003.00119.x
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    Cited by:

    1. Packalen, Mikko, 2010. "Complements and potential competition," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 244-253, May.
    2. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.

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