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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. Durham, Yvonne & McCabe, Kevin & Olson, Mark A. & Rassenti, Stephen & Smith, Vernon, 2004. "Oligopoly competition in fixed cost environments," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(2), pages 147-162, February.
  2. Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers, Economics Group, Nuffield College, University of Oxford 2002-W14, Economics Group, Nuffield College, University of Oxford.
  3. Kritikos, Alexander & Bolle, Friedel, 2004. "Punishment as a public good. When should monopolists care about a consumer boycott?," Journal of Economic Psychology, Elsevier, Elsevier, vol. 25(3), pages 355-372, June.
  4. John Duffy, 2004. "Agent-Based Models and Human Subject Experiments," Computational Economics, EconWPA 0412001, EconWPA.
  5. Buchheit, Steve & Feltovich, Nick, 2010. "Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-124, Scottish Institute for Research in Economics (SIRE).
  6. Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 43(2), pages 203-225.
  7. Kelly, Frank S., 1995. "Laboratory subjects as multiproduct monopoly firms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 27(3), pages 401-420, August.

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