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Sunk Costs, Contestability, and the Latent Contract Market

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  • Christodoulos Stefanadis

Abstract

The idea that an industry with sunk costs may be contestable even in the absence of long-term contracts has received little attention informal economic theory yet is sometimes popular among practitioners. This paper formally illustrates the argument. In an infinitely repeated game, there exists a class of contestable outcomes in which the monopolist sells only on the spot market and charges low prices along the equilibrium path to prevent customers from resorting to long-term contracts. The crucial test for contestability is the level of transaction costs in the latent contract market. Copyright (c) 2003 Massachusetts Institute of Technology.

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  • Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, March.
  • Handle: RePEc:bla:jemstr:v:12:y:2003:i:1:p:119-138
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    References listed on IDEAS

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    Cited by:

    1. Packalen, Mikko, 2010. "Complements and potential competition," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 244-253, May.
    2. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.

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