Endogenous Market Structures and Innovation
13 Pages Posted: 13 Jan 2011
Date Written: December 1, 2010
Abstract
One of the pioneering works on endogenous market structures, by Tandon (1984), has extended the standard Cournot model with linear demand to endogenous entry and sunk R&D costs to show that the endogenous number of firms is independent from the size of the market. I generalize the model in many directions and show that, as long as the exogenous fixed costs are positive, the endogenous market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton (1991).
Keywords: Oligopoly, Endogenous entry, Sunk costs, R&D investment
JEL Classification: L1
Suggested Citation: Suggested Citation