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

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

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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.

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Bibliographic Details
Main Authors: Kessides, Ioannis N., Tang, Li
Format: Policy Research Working Paper biblioteca
Language:English
Published: 2011-01-01
Subjects:ACCOUNTING, ACCOUNTING STANDARD, ADVERTISING, AVERAGE COSTS, BARRIER TO ENTRY, BARRIERS TO ENTRY, BENCHMARK, BUSINESS ECONOMICS, CAPITAL INVESTMENTS, CAPITAL STRUCTURE, COLLUSION, CONSUMER GOODS, CONSUMERS, CONTESTABILITY, CONTESTABLE MARKETS, DEVELOPMENT BANK, DEVELOPMENT POLICY, DURABLE, ECONOMETRIC ANALYSIS, ECONOMETRICS, ECONOMIC PERFORMANCE, ELASTICITY, ENTRY BARRIER, ENTRY BARRIERS, EQUATIONS, EQUIPMENT, EXPENDITURE, EXPENDITURES, HIGH LEVELS, INDUSTRIAL ECONOMICS, INTANGIBLE, INTERNATIONAL BANK, INVESTING, LEVY, MARKET CONCENTRATION, MARKET EXIT, MARKET FORCES, MARKET POWER, MARKET SHARE, MARKET SHARES, MARKET STRUCTURE, MERGERS, PERFECT COMPETITION, POLITICAL ECONOMY, RANDOM WALK, REGULATORY REGIMES, RESERVES, SALE, SALES, SHARE OF INVESTMENT, SMALL BUSINESS, STRUCTURAL CHANGE, SUNK COSTS, TAX, TAX TREATMENT, VALUABLE KNOWLEDGE, VOLATILITY, WORLD MARKETS,
Online Access:http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110118154720
http://hdl.handle.net/10986/3312
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Summary: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.

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