Endogenous Sunk Costs, Quality Competition and Welfare: A Technical Note

8 Pages Posted: 15 Jan 2011 Last revised: 17 May 2011

See all articles by George S. Ford

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies

Michael L. Stern

Auburn University; Phoenix Center for Advanced Legal & Economic Public Policy Studies

Date Written: December 16, 2010

Abstract

Quality competition, by increasing sunk costs, may produce levels of concentration even higher than expected in its absence. Based on Sutton's model of endogenous sunk costs and quality competition, we show that consumers, under certain conditions, may benefit from higher industry concentration driven by an increase in endogenous sunk costs despite the effects on concentration and likely attenuation of price competition.

Keywords: Sunk Costs, Market Structure, Quality Competition, Consumer Welfare, John Sutton, Communications, Telecommunications, FCC

JEL Classification: L00

Suggested Citation

Ford, George S. and Stern, Michael L., Endogenous Sunk Costs, Quality Competition and Welfare: A Technical Note (December 16, 2010). Available at SSRN: https://ssrn.com/abstract=1739760 or http://dx.doi.org/10.2139/ssrn.1739760

George S. Ford (Contact Author)

Phoenix Center for Advanced Legal & Economic Public Policy Studies ( email )

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

Michael L. Stern

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Phoenix Center for Advanced Legal & Economic Public Policy Studies

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

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