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Sunk costs, market contestability, and the size distribution of firms, Volume 1
 
Author:Kessides, Ioannis N.; Tang, Li; Country:World;
Date Stored:2011/01/18Document Date:2011/01/01
Document Type:Policy Research Working PaperSubTopics:Markets and Market Access; Economic Theory & Research; Water and Industry; Debt Markets; Access to Markets
Language:EnglishRegion:The World Region
Report Number:WPS5540Collection Title:Policy Research working paper ; no. WPS 5540
Volume No:1  

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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