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2 edition of Endogenous sunk costs, industry size and market structure found in the catalog.

Endogenous sunk costs, industry size and market structure

Catherine Matraves

Endogenous sunk costs, industry size and market structure

a four country test.

by Catherine Matraves

  • 379 Want to read
  • 23 Currently reading

Published by School of Economic and Social Studies, University of East Anglia in Norwich .
Written in English


Edition Notes

SeriesDiscussion paper / Economics Research Centre, University of East Anglia -- no.9224
ID Numbers
Open LibraryOL20359448M

  However, recent contributions in industrial organization on endogenous sunk costs (Dasgupta and Stiglitz, ; Spence, ; Sutton, , ) suggest that the relation between market size and the equilibrium number of firms may be more complex than in the simple IO framework used in Ethier () and in subsequent applications. market structure for the salt and sugar industries using theoretical framework above. Both Salt and Sugar industries were initially highly fragmented. Today they are highly concentrated. Theoretical Predictions: market will become more concentrated where there is (i) a decrease in market size relative to sunk costs or (ii) an. through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between “natural” and “market‐power‐ driven” increases in concentration. *Kellogg School of Management, Northwestern University and NBER. Exogenous Fixed Cost Case”: • Model = 1− size of market (number of consumers) Assume each consumer has unit income, get industry demand (per consumer) equals = Unless ≥ 0 (and then go to outside good). Suppose marginal cost and entry cost is. • Work out Cournot.


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Endogenous sunk costs, industry size and market structure by Catherine Matraves Download PDF EPUB FB2

Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature over the past ten years and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S.

Bain and his successors. The new theoretical literature has engendered pessimism in. Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature recently and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S.

Bain and his e many results turn out to depend on detailed features of the market. The seminal model considers one simple but general relationship, that between market structure and market size, focusing on the competitive roles of endogenous sunk costs in the form of advertising and/or research and development (R&D).Cited by:   Thus, much like in Sutton (), there is a lower bound of market concentration that is strictly positive when spillovers are low even if the market size is cast more light on this important result, it would be insightful to compare it with the standard market setup in which there are no endogenous sunk costs, that is, with the situation in which there are only setup costs, F by: 4.

Finally, note that in Sutton’s approach both endogenous sunk costs and market concentration are endogenously determined in industry equilibrium by such parameters like market size and e ciency of the sunk costs in a ecting the market outcome (say, preferences of consumers).

Much like Sutton () and Sutton (), we focus on the markets at. We organize our description of market structure around the notion that firms can improve brand perceptions through advertising investments, as in Sutton’s endogenous sunk cost the-ory.

In the data, observed advertising levels escalate (i.e. larger brands) in larger markets while the number of advertised brands within an industry remains stable.

Here (S/l) measures the effective size of the market, and oc measures what Sunk Costs calls the toughness of price competition. The case a = 1 corresponds to Cournot behavior with constant elasticity demand; the larger is a, the more rapidly entry erodes margins.

The key implication of (2) is that. start-up costs, plant of minimum e¢ cient scale, acquiring industry know-how.

Endogenous sunk costs: variable size investments the returns to which increase with market size, e.g. advertising & R&D investments that proportionally increase demand.

Jonathan Levin Entry and Market Structure Fall 10 / 40 (Economics Stanford University). The determinants of market structure: theory of market structure in exogenous and endogenous sunk cost industries; technology and market structure; empirical evidence.

Competition policy and regulation Competition and industrial policy: competition policy in the EU, the USA and Japan; current issues in competition policy; industrial policy towards. Dynamics of Market Structure Dynamic Games Learning by Doing and Network Effects Shakeouts Turbulence 5 Caveats and Controversies Endogenous Sunk Costs: A Caveat Can ‘Increasing Returns’ explain Concentration.

Fixed versus Sunk Costs 6 Unanswered Questions and Current Research. Keywords: Sunk Costs, Endogenous Sunk Costs, Quality Competition, Welfare, Market Structure. Introduction.

The number of firms that can supply a given market is not infinite, but Endogenous sunk costs by the underlying supply-side and demand-side conditions of the market. An excellent pres- entation of these ideas is provided in John Sutton’s. ceteris paribus, to a more fragmented market structure. Regulation.

The main regulatory variable relevant for the market structure is the amount of spectrum allocated to the industry. The greater this amount, the more fragmented is the industry. A second tool of the ENDOGENOUS SUNK COSTS IN MOBILE TELECOMMUNICATIONS 57 Following Sutton’s () Endogenous Sunk Costs (ESC) theory, we or-ganize our description of market structure around an industry’s advertising intensity.

Advertising is assumed to increase the perceived quality of a brand. If advertising industry size and market structure book of a Endogenous sunk costs and sunk. prediction that for industries with significant endogenous sunk costs, as the size of the market increases there is a lower bound to industry concentration, and the increase in sales might even cause the number of firms to shrink (Suttonch.

This is caused by a rise in the sunk. We describe the industrial market structure of CPG categories. The analysis uses a unique database spanning 31 consumer package goods (CPG) categories, 39 months, and the 50 largest US metropolitan markets. We organize our description of market structure around the notion that firms can improve brand perceptions through advertising investments, as in Sutton’s endogenous sunk cost theory.

Downloadable. This paper uses a model of endogenous sunk cost (ESC) competition to explain the industrial structure of the supermarket industry, where a few powerful chains provide high quality products at low prices. The predictions of this model accord well with the features of the supermarket industry documented here.

Using a novel dataset of store level observations, I demonstrate that 1. Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature over the past ten years and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S.

Bain and his successors. The new theoretical literature has eng/5(1). Downloadable. This paper offers a theoretical explanation of the recent sales concentration in the U.S. economy. The model is based on in-house R&D, which is involved in scale economies.

An R&D subsidy helps the expansion of larger firms and allows them to take higher markups. Thus, it induces a concentrated market structure. This paper uses data from retail industries in Chile to test Shaked and Sutton's () hypothesis of endogenous sunk costs.

I find that industries which are less likely to have endogenous sunk costs display a signicant negative relationship between market size and concentration.

In contrast, in the supermarket industry, where investment in advertising is presumed to be more intense, the tests. The non-fragmentation result occurs in Sutton () with endogenous sunk costs, because “a competitive escalation of outlays at stage 1 of the game raises the equilibrium level of sunk costs incurred by incumbent firms in step with increases in the size of the market thus offsetting the tendency toward fragmentation” (Sutton, ).

Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature over the past ten years and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S.

Bain and his successors. The new theoretical literature has engendered Reviews: 3. SchmalenseeBonannoHay In addition, in endogenous sunk costs industries where vertical product differentiation is prominent, the competitive mechanism of endogenous sunk costs.

"endogenous sunk costs" (ESC). "Toughness" means "how prices change with market structure," and ESC means irreversible investments in competitive capability that are decision variables of the firm.

The presence of ESC is closely linked to the prospect of strategic interaction influencing entry, exit, and industry structure. Second, the book. sunk costs, it is possible to show an inverse relationship between market size and market structure. For the latter type of industries, where sunk costs are endogenous, such a negative relationship does not necessarily emerge as market size increases.

This is because sunk costs, such as advertising or R&D expenditure, raise with market size. Endogenous Sunk Costs and the Geographic Distribution of of small-share, non-advertised products in a given industry as market size grows. To analyze concentration, we partition the industries into advertising intense and non-advertising intense and R&D) sunk costs on market structures in the food industry across international markets Competition in quality with escalating levels of endogenous sunk costs may produce levels of concentration even higher than expected in their absence.

We show that consumers may very well benefit from such expenditures despite the effects on concentration and likely attenuation of. endogenous sunk costs (NESC). Both the NESC and our RESC theories explain the observations of quality rising with market size and the bound on industry concentration.

The nature of the process by which quality, sunk costs, and market size and structure interact is much di erent, however. Thus, the paper suggests that there may be pitfalls in.

The determinants of market structure are: Number of firms (N), Size of Market (s) and Intensity of Price Competition (t). Before we analyse how each factor affects the market structure, we have to distinguish between the two main types of market.

Sheldon () identifies, the presence of endogenous sunk costs in R&D expenditures, 1 In regards to economies of scale and/or economies of scope in agricultural biotechnology, Chen, Naseem, and Pray () find evidence that supports economies of scope as well as internal and external spillover. Correspondingly, observed concentration levels in advertising-intensive industries are bounded away from zero irrespective of market size.

KeywordsMarket structure–Endogenous sunk costs. industry. If the endogenous sunk costs like advertisement, R&D and product quality are (relatively) more significant than the setup costs, the theory of endogenous sunk costs predicts that the market will be dominated by a few firms as the market size grows over time since large endogenous sunk costs can deter entry and limit competition.

endogenous, interact with one another to determine the equilibrium market structure in an industry. For the case of exogenous sunk costs, the central prediction of the theory is that an increase in market size relative to setup costs may lead to inde finitely low levels of market concentration.6 In the case of endogenous sunk costs, however.

Most industries exhibit striking asymmetries across markets in both a given brand’s market share and the industry’s rank-order of shares. Following Sutton’s theory of endogenous sunk costs, a robust set of gametheoretic predictions is generated regarding industrial market structure and the role of.

Bakker, G. The Decline and Fall of the European Film Industry: Sunk Costs, Market Size and Market Structure, – Economic History Review, 58(2): – Find this resource: Bakker, G. The Making of a Music Multinational: Polygram’s International Businesses, – Business History Review, 80(2): 81– expands.

Thus, endogenous sunk-cost investment is used as barriers to entry by dominant banks to lend banking stability. In order to assess if the Islamic banking industry is characterized by endogenous sunk-cost investment, our analysis will proceed in the following steps with. model.

When market structure is exogenous, questions of time consistency of regulatory measures may arise if there is also scope for setting sunk costs endogenously. The relevance of this result in practice is illustrated with reference to the regulatory design of market structure in the European mobile telecommunications industry.

Auctioning the. endogenous sunk costs, as developed in Sutton (, ), which largely avoids causal econometric estimation in favour of robust reduced form relationships that describe the evolution of R&D spending in conjunction with competition intensity and market structure.

4 Proposition 1: For the Cournot 3-stage Endogenous Sunk Costs model, with F=A(u) + σ and A(u) = a/γ(uγ – 1), if the second order condition γ > max{1,a/2σ} holds, then the equilibrium number of firms N* is bounded above, and an upper bound is 2 + ½ max{γ,a/σ}.The proof of this proposition is provided in Appendix B of this paper.

market industry are the result of competitive investment in endogenous sunk costs. Using the bounds regression methodology developed in Sutton (), I document the existence of a large, positive lower bound to concentration that remains bounded above zero regardless of market size.

Testing the theory of Sutton (), this paper presents empirical evidence consistent with the predictions of the endogenous sunk cost model of competition, with an application to banks. In particular, banking markets remain concentrated regardless of market size. Given an asymmetric oligopoly where dominant and fringe firms coexist, the number of dominant banks remains unchanged with market.

remains bounded away from perfect competition as market size becomes large. The industry attributes consistently identified by the literature and important in the development of an endogenous market structure model include: (i) endogenous sunk costs in the.

2. The Model Consider an endogenous-sunk-cost industry, and assume further that each firm produces one variety of the product at a single plant. Competition in such an industry can be modeled using a noncooperative three-stage game.

At stage 1 firms simultaneously decide whether or not to enter at a given sunk cost of entry.If market size ↑→ n. e ↑& industry concentration ↓ • Not verified empirically in all industries • ∃industries with large increase of market demand over time.

and. persistently high concentration • To reconcile theory with facts: endogenous sunk costs • Lesson: In industries with exogenous sunk costs, industry .