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Market Contestability in the Presence of Sunk (Entry) Costs

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  • Don Coursey
  • R. Mark Isaac
  • Margaret Luke
  • Vernon L. Smith

Abstract

This article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a "natural monopoly"-type cost structure where sunk costs are neither zero nor infinite. Several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design. Sunk costs are found to weaken the support for "strong" interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance. Yet the disciplining power of contestability remains impressive, with no indications of sustained monopoly pricing.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 15 (1984)
Issue (Month): 1 (Spring)
Pages: 69-84

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Handle: RePEc:rje:randje:v:15:y:1984:i:spring:p:69-84

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Cited by:
  1. Jim Engle-Warnick & Bradley J Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Series Working Papers 2002-W14, University of Oxford, Department of Economics.
  2. Dasgupta, Utteeyo, 2009. "Potential Competition in the Presence of Sunk Entry Costs: An Experiment," MPRA Paper 21945, University Library of Munich, Germany.
  3. Steve Buchheit & Nick Feltovich, 2011. "Experimental Evidence Of A Sunk‐Cost Paradox: A Study Of Pricing Behavior In Bertrand–Edgeworth Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 317-347, 05.
  4. Kritikos, Alexander & Bolle, Friedel, 2004. "Punishment as a public good. When should monopolists care about a consumer boycott?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 355-372, June.
  5. John Duffy, 2004. "Agent-Based Models and Human Subject Experiments," Computational Economics 0412001, EconWPA.
  6. Durham, Yvonne & McCabe, Kevin & Olson, Mark A. & Rassenti, Stephen & Smith, Vernon, 2004. "Oligopoly competition in fixed cost environments," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 147-162, February.
  7. Kelly, Frank S., 1995. "Laboratory subjects as multiproduct monopoly firms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 401-420, August.

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