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Hysteresis and import penetration with decreasing sunk entry costs

Henry Aray ()

International Economics and Economic Policy, 2015, vol. 12, issue 2, 175-188

Abstract: This article proposes an extension of Dixit (Q J Econ 104(2):205–228, 1989a, J Polit Econ 97(3):620–638, 1989b) assuming that potential exporting firms benefit from the experience of nearby firms already settled in the foreign market, which allows the sunk entry costs to diminish. The numerical results show that hysteresis (an effect that persists after the cause that brought it about has been removed) is lower than in Dixit’s case. More interestingly, hysteresis is not monotonically increasing with the number of firms. Moreover, decreasing sunk entry costs have a stronger impact on entering than exiting a foreign market. Regarding the market share, exchange rate depreciations hide the positive effect of decreasing sunk entry costs. In contrast, this positive effect dampens the negative effect of exchange rate appreciations. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Real options; Exchange rate; Import share; Sunk costs; F10; L16 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10368-014-0269-8

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