Sunk Costs, Contestability, and the Latent Contract Market
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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Volume (Year): 12 (2003)
Issue (Month): 1 (03)
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