Investigation of the Conditions for Concentration to Be Bounded in the Endogenous Sunk Costs Model
20 Pages Posted: 13 May 2008
Date Written: May 13, 2008
Sutton has developed a new theory of endogenous sunk costs, which predicts that industries with significant endogenous sunk costs will have a lower bound on concentration even as they grow in output. Endogenous sunk costs are fixed costs that firms can choose to invest in, which affect the price-cost margin of a firm. This paper examines the conditions under which concentration is bounded below. It first analyzes the Cournot three-stage endogenous sunk costs model, and determines the necessary conditions for a lower bound, and derives that lower bound. A proof is provided of the proposition that concentration is bounded below for this model. The paper then proposes a more general framework for analyzing the necessary conditions for concentration to be bounded below under alternative frameworks, that allows us to generalize beyond the Cournot model.
Keywords: endogenous sunk costs, quality, concentration
JEL Classification: L11,L15
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