Exit, sunk costs and the selection of firms

Yves Richelle and Paolo Garella
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Yves Richelle: Département d'Economique, Université Laval, Québec, G1K 7P4, CANADA

Economic Theory, 1999, vol. 13, issue 3, 643-670

Abstract: This paper aims to identify the cost characteristics of exiting firms whenever firms are playing an infinite horizon supergame with time-invariant cost and demand functions. With more than two firms, the problem of which firms exit is quite similar to a coalition formation one. Solving this coalition formation problem, we obtain that the exiting firms are those with higher average cost functions whenever reentry is costless while, whenever reentry is unprofitable, the exiting firms are those with lower marginal (and possibly average) cost functions. Since reentry costs are typically sunk, our analysis points out that the presence of sunk costs affects not only the size (as it is well known) but also the composition of the industry.

Keywords: Exit; Sunk; costs; ·; Coalition; formation.; · (search for similar items in EconPapers)
Date: 1999-04-15
Note: Received: April 5, 1995; revised version: January 28, 1998
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Exit, Sunk Costs and the Selection of Firms (1997)
Working Paper: Exit, Sunk Costs and the Selection of Firms (1995)
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