IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v13y1999i3p643-670.html
   My bibliography  Save this article

Exit, sunk costs and the selection of firms

Author

Listed:
  • Yves Richelle

    (Département d'Economique, Université Laval, Québec, G1K 7P4, CANADA)

  • Paolo G. Garella

    (Dipartimento di Scienze Economiche, Università di Bologna, Bologna, ITALY)

Abstract

This paper aims to identify the cost characteristics of exiting firms whenever firms are playing an infinite horizon supergame with time-invariant cost and demand functions. With more than two firms, the problem of which firms exit is quite similar to a coalition formation one. Solving this coalition formation problem, we obtain that the exiting firms are those with higher average cost functions whenever reentry is costless while, whenever reentry is unprofitable, the exiting firms are those with lower marginal (and possibly average) cost functions. Since reentry costs are typically sunk, our analysis points out that the presence of sunk costs affects not only the size (as it is well known) but also the composition of the industry.

Suggested Citation

  • Yves Richelle & Paolo G. Garella, 1999. "Exit, sunk costs and the selection of firms," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 643-670.
    • Handle: RePEc:spr:joecth:v:13:y:1999:i:3:p:643-670
    Note: Received: April 5, 1995; revised version: January 28, 1998
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00199/papers/9013003/90130643.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, vol. 45(7), pages 1623-1630, October.
    3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    4. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-960, July.
    5. Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
    6. Kalai, Ehud & Samet, Dov, 1985. "Monotonic Solutions to General Cooperative Games," Econometrica, Econometric Society, vol. 53(2), pages 307-327, March.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    8. Pankaj Ghemawat & Barry Nalebuff, 1990. "The Devolution of Declining Industries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 167-186.
    9. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gamal Atallah, 2006. "Opportunity Costs, Competition, and Firm Selection," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 409-430.
    2. Elena Cefis & Cristina Bettinelli & Alex Coad & Orietta Marsili, 2022. "Understanding firm exit: a systematic literature review," Small Business Economics, Springer, vol. 59(2), pages 423-446, August.
    3. Gabszewicz, J.J. & Marini, M. & Tarola, O., 2015. "Alliance Formation in a Vertically Differentiated Market," LIDAM Discussion Papers CORE 2015030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 15, pages 1073-1225, Elsevier.
    3. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    4. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    5. Choe, Chongwoo & Ishiguro, Shingo, 2008. "On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation," MPRA Paper 13451, University Library of Munich, Germany.
    6. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, vol. 57(C), pages 108-117.
    7. Moszoro Marian W., 2018. "Public–Private Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(2), pages 1-15, April.
    8. Shiran Rachmilevitch, 2022. "Pre-bargaining Investment Implies a Pareto Ranking of Bargaining Solutions," Group Decision and Negotiation, Springer, vol. 31(4), pages 769-787, August.
    9. Wolfgang Kerber & Simonetta Vezzoso, 2004. "EU Competition Policy, Vertical Restraints, and Innovation: An Analysis from an Evolutionary Perspective," Marburg Working Papers on Economics 200414, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Mehrdad Vahabi, 1999. "From Walrasian General Equilibrium to Incomplete Contracts: Making Sense of Institutions," Post-Print halshs-03704424, HAL.
    11. Devarakonda, Ramakrishna & Reuer, Jeffrey J. & Tadikonda, Harsha, 2022. "Founder social capital and value appropriation in R&D alliance agreements," Research Policy, Elsevier, vol. 51(4).
    12. Schmitz, Patrick W., 2006. "Book Review of “Contract Theory” (Bolton and Dewatripont, 2005)," MPRA Paper 6977, University Library of Munich, Germany.
    13. Deffains, Bruno & Demougin, Dominique M., 2006. "Governance: Who controls matters," SFB 649 Discussion Papers 2006-053, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    14. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1375-1418.
    15. Jeremy C. Stein, 2000. "Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms," NBER Working Papers 7705, National Bureau of Economic Research, Inc.
    16. Raghuram G. Rajan & Luigi Zingales, 1998. "Power in a Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 387-432.
    17. Bakos, J. Yannis. & Brynjolfsson, Erik., 1993. "When quality matters : information technology and buyer-supplier relationships," Working papers 140. Working paper (Sloan, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    18. Christos Pitelis, 2013. "Towards a More ‘Ethically Correct’ Governance for Economic Sustainability," Journal of Business Ethics, Springer, vol. 118(3), pages 655-665, December.
    19. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    20. João VIEIRA-MONTEZ, 2004. "Downstream Concentration and Producer's Capacity Choice," Cahiers de Recherches Economiques du Département d'économie 04.13, Université de Lausanne, Faculté des HEC, Département d’économie.

    More about this item

    Keywords

    Exit Sunk costs · Coalition formation. ·;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:13:y:1999:i:3:p:643-670. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.