Sunk costs, contestability, and the latent contract market

Christodoulos Stefanadis

No 75, Staff Reports from Federal Reserve Bank of New York

Abstract: The idea that an industry with sunk costs may be contestable even in the absence of long-term contracts has received little attention from formal economic theory yet is popular among monopolists facing antitrust suits. The paper formally illustrates the argument. In an infinitely repeated game, there exists a class of contestable outcomes in which the monopolist sells only on the spot market and charges low prices along the equilibrium path to prevent customers from resorting to long-term contracts. Then, the crucial test for contestability is the level of transaction costs in the latent contract market.

Keywords: Monopolies; Contracts; Antitrust law (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-ind and nep-law
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Related works:
Journal Article: Sunk Costs, Contestability, and the Latent Contract Market (2003)
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