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Some thoughts on the Sutton approach

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  • Federico Etro

Abstract

I analyze the relation between market size and number of firms when an endogenous number of firms chooses the market strategy and (simultaneously or sequentially) an R&D investment. I generalize the linear Cournot model with an endogenous cost-reducing activity and show that, as long as exogenous fixed costs are positive, the market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton. However, the increase of the market size reduces the prices and expands individual investment and production exactly as in endogenous market structure only with exogenous fixed costs. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.
    • Handle: RePEc:kap:jeczfn:v:112:y:2014:i:2:p:99-113
    DOI: 10.1007/s00712-013-0349-1
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    References listed on IDEAS

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    Cited by:

    1. Azamat Valei, 2017. "Advertising Response to New Entry," CERGE-EI Working Papers wp588, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Matsumura, Toshihiro & Yamagishi, Atsushi, 2017. "Long-run welfare effect of energy conservation regulation," Economics Letters, Elsevier, vol. 154(C), pages 64-68.
    3. Yuichiro Matsumoto, 2018. "Endogenous Sunk Cost, Scale Economies, and Market Concentration," Discussion Papers in Economics and Business 18-20, Osaka University, Graduate School of Economics.
    4. Senyuta, Olena & Žigić, Krešimir, 2016. "Managing spillovers: An endogenous sunk cost approach," Information Economics and Policy, Elsevier, vol. 35(C), pages 45-64.

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    More about this item

    Keywords

    Endogenous entry; Sunk costs; R&D investment; L1;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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