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Hysteresis and import penetration with decreasing sunk entry costs

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  • Henry Aray

Abstract

This article proposes an extension of Dixit (Q J Econ 104(2):205–228, 1989a, J Polit Econ 97(3):620–638, 1989b) assuming that potential exporting firms benefit from the experience of nearby firms already settled in the foreign market, which allows the sunk entry costs to diminish. The numerical results show that hysteresis (an effect that persists after the cause that brought it about has been removed) is lower than in Dixit’s case. More interestingly, hysteresis is not monotonically increasing with the number of firms. Moreover, decreasing sunk entry costs have a stronger impact on entering than exiting a foreign market. Regarding the market share, exchange rate depreciations hide the positive effect of decreasing sunk entry costs. In contrast, this positive effect dampens the negative effect of exchange rate appreciations. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Henry Aray, 2015. "Hysteresis and import penetration with decreasing sunk entry costs," International Economics and Economic Policy, Springer, vol. 12(2), pages 175-188, June.
    • Handle: RePEc:kap:iecepo:v:12:y:2015:i:2:p:175-188
    DOI: 10.1007/s10368-014-0269-8
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    References listed on IDEAS

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    Cited by:

    1. Aziz, Nusrate & Ahmad, Ahmad Hassan, 2018. "Exchange rate hysteresis in the UK imports from the South Asian Countries," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 159-178.
    2. Jolita Adamonis & Matthias Göcke, 2019. "Modelling economic hysteresis losses caused by sunk adjustment costs," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 299-318, April.

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    More about this item

    Keywords

    Real options; Exchange rate; Import share; Sunk costs; F10; L16;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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