Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, March 1, 2011

Sunk Costs, Market Contestability, and the Size Distribution of Firms

Posted by D. Daniel Sokol

Ioannis N. Kessides, World Bank and Li Tang, describe Sunk Costs, Market Contestability, and the Size Distribution of Firms.

ABSTRACT: This paper offers a new economic explanation for the observed inter-industry differences in the size distribution of firms. The empirical estimates--based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit United States manufacturing industries--indicate that increased market contestability, as signified by low sunk costs, tends to reduce the dispersion of firm sizes. These findings provide support for one of the key predictions of the theory of contestable markets: that market forces under contestability would tend to render any inefficient organization of the industry unsustainable and, consequently, tighten the distribution of firms around the optimum.

http://lawprofessors.typepad.com/antitrustprof_blog/2011/03/sunk-costs-market-contestability-and-the-size-distribution-of-firms.html

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