Potential Competition in the Presence of Sunk Entry Costs: An Experiment
I study the effect of sunk entry-costs on potential competition in a multi-market framework, where potential entrants have different home market profits. Although sunk-entry-costs are supposed to increase entry barriers, my experimental results suggest that firms view entry costs differently depending on their home market profits. I find that subjects are reluctant to enter, and compete in another market if they are already earning monopoly rents. Subjects instead, collude tacitly and earn monopoly rents in home markets, thereby weakening the effect of potential competition. In contrast, subjects who earn small secure returns in their home markets aggressively enter the contestable market whenever there are scopes for earning net profits. The threat of entry and the effects of potential competition are strong in the latter situation, forcing the monopoly incumbents to lower prices to limit-pricing levels.
|Date of creation:||2009|
|Publication status:||Published in New Zealand Economics Papers 2.43(2009): pp. 203-225|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Weitzman, Martin L, 1983. "Contestable Markets: An Uprising in the Theory of Industry Structure: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 486-487, June.
- 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.
- Evenden, Rhys D. & Williams, Alan W., 2000. "Contestability: The Debate and Industry Policy," Economic Analysis and Policy, Elsevier, vol. 30(1), pages 75-90, March.
- Shepherd, William G, 1984. ""Contestability" vs. Competition," American Economic Review, American Economic Association, vol. 74(4), pages 572-587, September.
- Coursey, Don & Isaac, R Mark & Smith, Vernon L, 1984. "Natural Monopoly and Contested Markets: Some Experimental Results," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 91-113, April.
- Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-622, November.
- Peteraf, Margaret A & Reed, Randal, 1994. "Pricing and Performance in Monopoly Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 193-213, April.
- Glenn W. Harrison & Michael McKee, 1985. "Monopoly Behavior, Decentralized Regulation, and Contestable Markets: An Experimental Evaluation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 51-69, Spring.
- Brock, William A, 1983. "Contestable Markets and the Theory of Industry Structure: A Review Article," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1055-1066, December.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:21945. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.