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Exit, Sunk Costs and the Selection of Firms

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  • Y. Richelle
  • P. G. Garella

Abstract

The paper analyzes the question of which cost characteristics are exhibited by the rms that exit an oligopolistic market when costs are asymmetric and firms can credibly be forced out by the remaining competitors. The main results are: (i) if reentry is impossible (due to the presence of large sunk costs), then the firm with the highest marginal cost function dtays in; if reentry is costless then the firm with the highest average cost exits. Consequenty sunk costs not only affect the number of firms in an industry, but they also enter the determination of the type of firms that resist predation.

Suggested Citation

  • Y. Richelle & P. G. Garella, 1995. "Exit, Sunk Costs and the Selection of Firms," Working Papers 214, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:214
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    References listed on IDEAS

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    Cited by:

    1. Gamal Atallah, 2006. "Opportunity Costs, Competition, and Firm Selection," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 409-430.
    2. Jean J. Gabszewicz & Marco A. Marini & Ornella Tarola, 2015. "Alliance Formation in a Vertically Differentiated Market," DIAG Technical Reports 2015-06, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    3. Elena Cefis & Cristina Bettinelli & Alex Coad & Orietta Marsili, 2022. "Understanding firm exit: a systematic literature review," Small Business Economics, Springer, vol. 59(2), pages 423-446, August.
    4. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.

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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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