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Sunk costs and the speed of market selection

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  • Werner Hölzl

Abstract

This paper studies the influence of sunk costs on industry evolution using the stylized pure selection model developed by Metcalfe. It is shown that sunk costs influence industry dynamics by reducing the speed of the replicator dynamics of competitive selection. Based on the theoretical model, we argue that sunk costs should lead to a reduction of market share reallocation dynamics and a larger share of stable firms. We validate these predictions empirically, finding that higher-sunk-cost industries have a larger share of stable firms and display lower market share dynamics. The result has practical implications for the interpretation of productivity decompositions. Copyright Springer-Verlag Berlin Heidelberg 2015

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  • Werner Hölzl, 2015. "Sunk costs and the speed of market selection," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 323-344, April.
    • Handle: RePEc:spr:joevec:v:25:y:2015:i:2:p:323-344
    DOI: 10.1007/s00191-014-0389-x
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    Cited by:

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    2. Klaus Friesenbichler & Werner Hölzl, 2020. "High-growth firm shares in Austrian regions: the role of economic structures," Regional Studies, Taylor & Francis Journals, vol. 54(11), pages 1585-1595, November.
    3. Jacob Rubæk Holm & Esben Sloth Andersen & J. Stanley Metcalfe, 2016. "Confounded, augmented and constrained replicator dynamics," Journal of Evolutionary Economics, Springer, vol. 26(4), pages 803-822, October.
    4. Antti Simola, 2018. "Government payments, market profits and structural change in agriculture," Journal of Evolutionary Economics, Springer, vol. 28(4), pages 837-857, September.

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    More about this item

    Keywords

    Competition; Intensity of competition; Firm growth; Productivity decompositions; L11; D24; B52;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;

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