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Sunk Costs, Market Contestability, and the Size Distribution of Firms

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  • Ioannis Kessides

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  • Li Tang

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Abstract

This 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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Suggested Citation

  • Ioannis Kessides & Li Tang, 2010. "Sunk Costs, Market Contestability, and the Size Distribution of Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 37(3), pages 215-236, November.
  • Handle: RePEc:kap:revind:v:37:y:2010:i:3:p:215-236
    DOI: 10.1007/s11151-010-9265-5
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    References listed on IDEAS

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    Cited by:

    1. Pierre Blanchard & Jean-Pierre Huiban & Claude Mathieu, 2012. "The determinants of firm exit in the French food industries," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 93(2), pages 193-212.
    2. Borchert, Ingo & Gootiiz, Batshur & Grover, Arti & Mattoo, Aaditya, 2012. "Landlocked or policy locked ? how services trade protection deepens economic isolation," Policy Research Working Paper Series 5942, The World Bank.
    3. Werner Hölzl, 2012. "Mobility Barriers and the Speed of Market Selection," WIFO Working Papers 437, WIFO.

    More about this item

    Keywords

    Contestability; Size distribution of firms; Sunk costs; L11; L22; L60; O38;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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