Sunk Costs, Market Contestability, and the Size Distribution of Firms
affiliation not provided to SSRN
January 1, 2011
World Bank Policy Research Working Paper No. 5540
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.
Number of Pages in PDF File: 29
Keywords: Markets and Market Access, Economic Theory & Research, Water and Industry, Access to Markets, Debt Markets
Date posted: January 25, 2011
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