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Sunk Costs, Market Structure, and Growth

Listed author(s):
  • Peretto, Pietro F.

I discuss a model of endogenous innovation that brings to the forefront the in-house R&D activity of the modern corporation. In a symmetric oligopoly, firms undertake cost-reducing R&D subject to a research technology with incomplete spillovers. Concentration of sales and R&D resources determine the optimal scale and the efficiency of firms' R&D operations and, thus, the rate of productivity growth. In addition, R&D expenditures (a sunk cost) are one component of total fixed costs and determine the number of active firms in zero-profit equilibrium. This feed-back makes the price, investment, entry, and exit decisions interdependent. A rich characterization of the balanced growth path, defined as the rate of growth and the number of firms that the market supports in general equilibrium, emerges. Multiple equilibria may exist and firms' expectations about rivalry determine the economy's performance.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 95-34.

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Date of creation: 1995
Publication status: Published in INTERNATIONAL ECONOMIC REVIEW, Vol. 37, 1996, pages 895-923
Handle: RePEc:duk:dukeec:95-34
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Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097

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