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Hysteresis and Import Penetration with Decreasing Sunk Costs

Henry Aray ()

No 11-09, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: This article proposes an extension of Dixit (1989, Quart. J. Econ.), assuming that potential exporting firms benefit from the experience of firms already settled in the foreign market which allows the sunk cost to diminish. In general, the numerical results show that hysteresis is lower as expected. More interestingly, hysteresis is decreasing with the number of firms. As regards the Dixit case, decreasing sunk cost has a greater impact on entering than on exiting. Finally, the combination of expected depreciation/appreciation rate and sunk cost has striking implications on the import share.

Keywords: Real Options; Exchange Rate; Sunk Cost (search for similar items in EconPapers)
JEL-codes: F14 F31 L16 (search for similar items in EconPapers)
Date: 2011-11
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