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Technology uncertainty, sunk costs, and industry shakeout

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  • Luís Cabral

Abstract

I propose a novel explanation for new industry shakeouts: because of capacity sunk costs and the fear of backing the wrong technology, firms initially invest up to a small capacity, leading to a large number of initial entrants. As the dust settles and a dominant technology emerges, surviving firms expand to their long-term optimal capacity, which results in a reduction in the number of competitors notwithstanding the increase in total market output. Copyright 2012 The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Suggested Citation

  • Luís Cabral, 2012. "Technology uncertainty, sunk costs, and industry shakeout," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 21(3), pages 539-552, June.
    • Handle: RePEc:oup:indcch:v:21:y:2012:i:3:p:539-552
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    File URL: http://hdl.handle.net/10.1093/icc/dtr050
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    Cited by:

    1. Luis Cabral & Zhu Wang & Daniel Yi Xu, 2018. "Competitor, Complementors, Parents and Places: Explaining Regional Agglomeration in the U.S. Auto Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 1-29, October.
    2. Fumiko Hayashi & Bin Grace Li & Zhu Wang, 2017. "Innovation, Deregulation, and the Life Cycle of a Financial Service Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 180-203, October.
    3. Xi Chen & Bertrand M. Koebel, 2017. "Fixed Cost, Variable Cost, Markups and Returns to Scale," Annals of Economics and Statistics, GENES, issue 127, pages 61-94.
    4. Fumiko Hayashi & Ms. Grace B Li & Zhu Wang, 2015. "Innovation, Deregulation, and the Life Cycle of a Financial Service Industry," IMF Working Papers 2015/192, International Monetary Fund.
    5. Bilgehan Uzunca & Bruno Cassiman, 2023. "Entry diversion: Deterrence by diverting submarket entry," Strategic Management Journal, Wiley Blackwell, vol. 44(1), pages 11-47, January.

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