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Sunk Costs, Market Structure And Growth

33 Pages Posted: 26 Nov 1997  

Pietro F. Peretto

Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Date Written: August 1995

Abstract

I discuss a model of endogenous innovation that brings to the forefront the in-house R&D activity of the modern corporation. In a symmetric oligopoly, firms undertake cost-reducing R&D subject to a research technology with incomplete spillovers. Concentration of sales and R&D resources determine the optimal scale and the efficiency of firms' R&D operations and, thus, the rate of productivity growth. In addition, R&D expenditures (a sunk cost) are one component of total fixed costs and determine the number of active firms in zero-profit equilibrium. This feed-back makes the price, investment, entry, and exit decisions interdependent. A rich characterization of the balanced growth path, defined as the rate of growth and the number of firms that the market supports in general equilibrium, emerges. Multiple equilibria may exist and firms' expectations about rivalry determine the economy's performance.

JEL Classification: E10, L16, O31, O40

Suggested Citation

Peretto, Pietro F., Sunk Costs, Market Structure And Growth (August 1995). Available at SSRN: https://ssrn.com/abstract=37751 or http://dx.doi.org/10.2139/ssrn.37751

Pietro F. Peretto (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1807 (Phone)
919-684-8974 (Fax)

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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