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Opportunity Costs, Competition, and Firm Selection

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  • Gamal Atallah

Abstract

The paper questions the standard economic assumptions that competing economic agents have identical reservation utility levels, and that when differences in opportunity costs exist, they can be conveniently represented by fixed costs. Asymmetries in opportunity costs are considered in relation to current efficiency. The effect of this interchangeability of skills is studied in the context of the effect of entry on firm selection in a Cournot setting. It is found that inefficient firms are more likely to crowd out efficient ones when the relationship between current efficiency and opportunity costs is strong, and when the fixed costs of changing markets are high. Moreover, in the long-run, firms with intermediate cost levels are likely to induce the exit of low and high cost firms. The model sheds light on the benefits of diversification by multiproduct and multinational firms, and their relationship to skill transferability.

Suggested Citation

  • Gamal Atallah, 2006. "Opportunity Costs, Competition, and Firm Selection," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 409-430.
    • Handle: RePEc:taf:intecj:v:20:y:2006:i:4:p:409-430
    DOI: 10.1080/10168730601039976
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    References listed on IDEAS

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    More about this item

    Keywords

    Entry; exit; firm selection; firm survival; opportunity costs; skill transferability; diversification;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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