Sunk Costs, Market Contestability, and the Size Distribution of Firms
AbstractThis 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 InfoArticle provided by Springer in its journal Review of Industrial Organization.
Volume (Year): 37 (2010)
Issue (Month): 3 (November)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=100336
Contestability; Size distribution of firms; Sunk costs; L11; L22; L60; O38;
Other versions of this item:
- Kessides, Ioannis N. & Tang, Li, 2011. "Sunk costs, market contestability, and the size distribution of firms," Policy Research Working Paper Series 5540, The World Bank.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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