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Sunk Entry Costs, Sunk Depreciation costs, and Industry Dynamics

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Author Info
Adelina Gschwandtner ()
Val E. Lambson ()

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Abstract

Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0902.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0902.

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Date of creation: Mar 2009
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Handle: RePEc:vie:viennp:0902

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L00 - Industrial Organization - - General - - - General

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  1. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April. [Downloadable!] (restricted)
  2. Adelina Gschwandtner & Val E. Lambson, 2006. "Sunk Costs, Profit Variability, and Turnover," Economic Inquiry, Oxford University Press, vol. 44(2), pages 367-373, April. [Downloadable!] (restricted)
  3. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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