Sunk Costs, Market Structure, and Growth

Pietro Peretto

No 95-34, Working Papers from Duke University, Department of Economics

Abstract: I discuss a model of endogenous innovation that brings to the forefront the in-house R&D activity of the modern corporation. In a symmetric oligopoly, firms undertake cost-reducing R&D subject to a research technology with incomplete spillovers. Concentration of sales and R&D resources determine the optimal scale and the efficiency of firms' R&D operations and, thus, the rate of productivity growth. In addition, R&D expenditures (a sunk cost) are one component of total fixed costs and determine the number of active firms in zero-profit equilibrium. This feed-back makes the price, investment, entry, and exit decisions interdependent. A rich characterization of the balanced growth path, defined as the rate of growth and the number of firms that the market supports in general equilibrium, emerges. Multiple equilibria may exist and firms' expectations about rivalry determine the economy's performance.

JEL-codes: E10 L16 O31 O40 (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (11)

Published in INTERNATIONAL ECONOMIC REVIEW, Vol. 37, 1996, pages 895-923

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