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Sunk Costs, Market Contestability, and the Size Distribution of Firms

29 Pages Posted: 20 Apr 2016  

Ioannis Kessides

World Bank

Li Tang

affiliation not provided to SSRN

Date Written: January 1, 2011

Abstract

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.

Keywords: Markets and Market Access, Economic Theory & Research, Water and Industry, Access to Markets, Debt Markets

Suggested Citation

Kessides, Ioannis and Tang, Li, Sunk Costs, Market Contestability, and the Size Distribution of Firms (January 1, 2011). World Bank Policy Research Working Paper No. 5540. Available at SSRN: https://ssrn.com/abstract=1747443

Ioannis N. Kessides (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Li Tang

affiliation not provided to SSRN

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