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On Sunk Costs and Trade Liberalization in Applied General Equilibrium

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  • Mercenier, Jean
  • Schmitt, Nicolas

Abstract

The authors argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. They introduce sunk costs into one such model calibrated with real-world data. The authors show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Mercenier, Jean & Schmitt, Nicolas, 1996. "On Sunk Costs and Trade Liberalization in Applied General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 553-571, August.
    • Handle: RePEc:ier:iecrev:v:37:y:1996:i:3:p:553-71
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    Cited by:

    1. Jean J. Gabszewicz & Marco A. Marini & Skerdilajda Zanaj, 2017. "Random Encounters and Information Diffusion about Markets," DEM Discussion Paper Series 17-24, Department of Economics at the University of Luxembourg.
    2. Rossana Patrón, 1999. "The imperfect mobility of labour: Going from theory to ‘virtual’ reality. Simulations with simple trade models," Documentos de Trabajo (working papers) 2299, Department of Economics - dECON.
    3. Jean J. Gabszewicz & Marco A. Marini & Skerdilajda Zanaj, 2023. "Random encounters and information diffusion about product quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 348-376, April.
    4. Gustavo Gonzaga & Maria Cristina Terra & Jorge Cavalcante, 1997. "O impacto do Mercosul sobre o emprego setorial no Brasil," Textos para discussão 382, Department of Economics PUC-Rio (Brazil).
    5. Kimakova, Alena & Rajabiun, Reza, 1999. "An Applied General Equilibrium Analysis of EU Integration for Hungary and Slovakia," Transition Economics Series 9, Institute for Advanced Studies.
    6. Schmitt, Nicolas & Weder, Rolf, 1998. "Sunk costs and cartel formation: Theory and application to the dyestuff industry," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 197-220, August.

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