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Sunk Costs, Contestability, and the Latent Contract Market

  • Christodoulos Stefanadis

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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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 12 (2003)
Issue (Month): 1 (03)
Pages: 119-138

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Handle: RePEc:bla:jemstr:v:12:y:2003:i:1:p:119-138
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  1. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May.
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