Endogenous Sunk Costs, Quality Competition and Welfare: A Technical Note
8 Pages Posted: 15 Jan 2011 Last revised: 17 May 2011
Date Written: December 16, 2010
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: Suggested Citation