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Entry, Sunk Costs and Market Structure

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  • Bentley MacLeod

Abstract

Typically, models that study the role of sunk costs suppose that incumbent firms face entry by a single firm each period. In this paper the set of equilibrium market structures that result when all firms are free to enter or exit and set prices each period is studied. The effect of sunk costs on the market structure is examined and it is shown that differing types of sunk cost can have quite different effects on market structure. Costs that are sunk due to the existence of product specific capital do not in general deter entry. Further it is found, contrary to the arguments of Baumol, Panzar and Willig (1982), that the freedom to enter and leave a market does not suggest that firms will earn zero profits in equilibrium.

Suggested Citation

  • Bentley MacLeod, 1986. "Entry, Sunk Costs and Market Structure," Working Paper 649, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:649
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    Cited by:

    1. Andersson, Fredrik & Skogh, Goran, 2003. "Quality, self-regulation, and competition: the case of insurance," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 267-280, April.
    2. Chang, Cheng-wei & Lai, Ching-chong, 2012. "Markups and the number of firms in a simple model of imperfect competition," Economics Letters, Elsevier, vol. 116(3), pages 277-280.
    3. Cairns, Robert D., 1996. "Uncertain contestability," Journal of Economic Behavior & Organization, Elsevier, vol. 30(1), pages 125-131, July.
    4. Marc Escrihuela-Villar & Jorge Guillen, 2011. "On Collusion and Industry Size," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 31-40, May.

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