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

Sunk Costs, Market Contestability, and the Size Distribution of Firms In this paper we offer a new economic explanation for the observed inter-industry differences in the size distribution of firms. Our empirical estimates based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit US 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://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

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

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Publisher
Springer US
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC.
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-010-9265-5
Publisher site
See Article on Publisher Site

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