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 InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5540.
Date of creation: 01 Jan 2011
Date of revision:
Markets and Market Access; Economic Theory&Research; Water and Industry; Access to Markets; Debt Markets;
Other versions of this item:
- Ioannis Kessides & Li Tang, 2010. "Sunk Costs, Market Contestability, and the Size Distribution of Firms," Review of Industrial Organization, Springer, vol. 37(3), pages 215-236, November.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
- NEP-BEC-2011-01-30 (Business Economics)
- NEP-COM-2011-01-30 (Industrial Competition)
- NEP-ENT-2011-01-30 (Entrepreneurship)
- NEP-IND-2011-01-30 (Industrial Organization)
- NEP-TID-2011-01-30 (Technology & Industrial Dynamics)
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