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Market Contestability in the Presence of Sunk (Entry) Costs


  • Don Coursey
  • R. Mark Isaac
  • Margaret Luke
  • Vernon L. Smith


This article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a "natural monopoly"-type cost structure where sunk costs are neither zero nor infinite. Several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design. Sunk costs are found to weaken the support for "strong" interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance. Yet the disciplining power of contestability remains impressive, with no indications of sustained monopoly pricing.

Suggested Citation

  • Don Coursey & R. Mark Isaac & Margaret Luke & Vernon L. Smith, 1984. "Market Contestability in the Presence of Sunk (Entry) Costs," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 69-84, Spring.
  • Handle: RePEc:rje:randje:v:15:y:1984:i:spring:p:69-84

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    References listed on IDEAS

    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
    3. Sharkey, William W. & Telser, Lester G., 1978. "Supportable cost functions for the multiproduct firm," Journal of Economic Theory, Elsevier, vol. 18(1), pages 23-37, June.
    4. Mirman, Leonard J. & Tauman, Yair & Zang, Israel, 1986. "Ramsey prices, average cost prices and price sustainability," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 123-140, June.
    5. ten Raa, Thijs, 1983. "Supportability and anonymous equity," Journal of Economic Theory, Elsevier, vol. 31(1), pages 176-181, October.
    6. John C. Panzar & Robert D. Willig, 1977. "Free Entry and the Sustainability of Natural Monopoly," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 1-22, Spring.
    7. William W. Sharkey, 1981. "Existence of Sustainable Prices for Natural Monopoly Outputs," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 144-154, Spring.
    8. Faulhaber, Gerald R & Levinson, Stephen B, 1981. "Subsidy-Free Prices and Anonymous Equity [Cross-Subsidization: Pricing in Public Enterprises]," American Economic Review, American Economic Association, vol. 71(5), pages 1083-1091, December.
    9. Baumol, William J & Bailey, Elizabeth E & Willig, Robert D, 1977. "Weak Invisible Hand Theorems on the Sustainability of Multiproduct Natural Monopoly," American Economic Review, American Economic Association, vol. 67(3), pages 350-365, June.
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    Cited by:

    1. David J. Teece, 1986. "Assessing The Competition Faced By Oil Pipelines," Contemporary Economic Policy, Western Economic Association International, vol. 4(4), pages 65-78, October.
    2. Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers 2002-W14, Economics Group, Nuffield College, University of Oxford.
    3. Durham, Yvonne & McCabe, Kevin & Olson, Mark A. & Rassenti, Stephen & Smith, Vernon, 2004. "Oligopoly competition in fixed cost environments," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 147-162, February.
    4. Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(2), pages 203-225.
    5. Buchheit, Steve & Feltovich, Nick, 2010. "Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly," SIRE Discussion Papers 2010-124, Scottish Institute for Research in Economics (SIRE).
    6. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics,in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011 Elsevier.
    7. Kritikos, Alexander & Bolle, Friedel, 2004. "Punishment as a public good. When should monopolists care about a consumer boycott?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 355-372, June.
    8. D.J. Butler, 1990. "Experimental Techniques in Economics: Some lessons to date," Economics Discussion / Working Papers 90-22, The University of Western Australia, Department of Economics.
    9. Kelly, Frank S., 1995. "Laboratory subjects as multiproduct monopoly firms: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 401-420, August.

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