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Sunk Costs, Market Contestability, and the Size Distribution of Firms

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  • Ioannis Kessides

    ()

  • Li Tang

    ()

Abstract

This paper offers a new economic explanation for the observed inter-industry differences in the size distribution of firms. The empirical estimates--based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit United States manufacturing industries--indicate that increased market contestability, as signified by low sunk costs, tends to reduce the dispersion of firm sizes. These findings provide support for one of the key predictions of the theory of contestable markets: that market forces under contestability would tend to render any inefficient organization of the industry unsustainable and, consequently, tighten the distribution of firms around the optimum.

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Bibliographic Info

Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 37 (2010)
Issue (Month): 3 (November)
Pages: 215-236

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Handle: RePEc:kap:revind:v:37:y:2010:i:3:p:215-236

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Web page: http://www.springerlink.com/link.asp?id=100336

Related research

Keywords: Contestability; Size distribution of firms; Sunk costs; L11; L22; L60; O38;

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References

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Cited by:
  1. Borchert, Ingo & Gootiiz, Batshur & Grover, Arti & Mattoo, Aaditya, 2012. "Landlocked or policy locked ? how services trade protection deepens economic isolation," Policy Research Working Paper Series 5942, The World Bank.
  2. Pierre Blanchard & Jean Pierre Huiban & Claude Mathieu, 2012. "The determinants of firm exit in the French food industries," Working Papers 167136, Institut National de la Recherche Agronomique, France.
  3. Werner Hölzl, 2012. "Mobility Barriers and the Speed of Market Selection," WIFO Working Papers 437, WIFO.

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