Sunk Costs and Market Structure
Price Competition, Advertising, and the Evolution of Concentration
592 pp., 6 x 9 in, 28 b&w illus.
- Published: August 24, 2007
- Published: June 25, 1991
Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature over the past ten years and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S. Bain and his successors. The new theoretical literature has engendered pessimism in recent years because many results turn out to depend on detailed features of the market that are difficult to measure. This has led many observers to argue that the new literature offers little basis for the kind of cross-industry studies that have formed the empirical base of the subject since the 1950s. Using current game-theoretic methods, John Sutton reexamines the traditional agenda. He argues that despite the "delicate" nature of many results, there are theoretical predictions that turn out to be extremely robust to reasonable changes in model specification, and these results should be taken into account when looking for statistical regularities across a broad spectrum of different industries. Sutton draws on a wide range of historical sources and on an intensive program of company interviews to assemble a matrix of industry studies relating to twenty markets within the food and drink sector, in six countries - France, the Federal Republic of Germany, Italy, Japan, the United Kingdom and the United States. He combines theory, econometric evidence, and a detailed account of the various patterns of evolution of structure found in these industries in a rigorous evaluation of the strengths and limitations of a game-theoretic approach in explaining the evolution of industrial structure.
Sutton eschews the 'possibility' results of the theoretical product differentiation literature, and instead focusses on robust comparative statics predictions. These predictions are then confronted with a thorough investigation of twenty food and drink product markets in six countries. The result is a unique and informative mixture of theory and evidence.
Robert Porter, Professor of Economics, Northwestern University
A clear, concise blending of theory and empirical analysis. The international comparisons of the industries examined shed new insights into the common and unique organizational characteristics of the industries studied.
Willard F. Mueller, Research Professor, The University of Wisconsin
An excellent piece of empirical work by a leader in industrial organization. Econometric tests and industry studies are carefully guided by sound theory. A must reading for students in the field.
Jean Tirole, Scientific Director at the Institut d'Economie Industrielle, Researcher at CERAS (of the Ecole Nationale des Ponts et Chaussées), and Visiting Professor at MIT
This study represents a simple yet fundamental and deep test of modern game theory models, illustrating the process by which entry and exit bring the population of firms in a market to the equilibrium number in light of that market's mode of competition.
Richard E. Caves