Market Contestability in the Presence of Sunk (Entry) Costs
Volume: Volume 15, No. 1
Issue: Spring 1984
Pages: pp. 69-84
Authors: Don Coursey, R. Mark Isaac, Margaret Luke and Vernon L. Smith
Title: Market Contestability in the Presence of Sunk (Entry) Costs
Abstract: This article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a "natural monopoly"-type cost structure where sunk costs are neither zero nor infinite. Several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design. Sunk costs are found to weaken the support for "strong" interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance. Yet the disciplining power of contestability remains impressive, with no indications of sustained monopoly pricing.
JEL Classification
Market Structure: Industrial Organization and Corporate Strategy (6110)