Sunk Costs,Market Contestability,and the Size Distribution of Firms |
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Authors: | Ioannis N Kessides Li Tang |
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Institution: | (1) Department of Economics, University of Arizona, Tucson, AZ, USA;(2) Present address: Department of Economics, Franklin and Marshall College, Lancaster, PA, USA |
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Abstract: | 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. |
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Keywords: | |
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