Exit, sunk costs and the selection of firms
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.
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- The effects of sunk costs on entry and exit: Evidence from 36 countries
- The Devolution of Declining Industries
- A Theory of Exit in Duopoly
- Sunk costs, entry and clustering
- Live or let die? alternative routes to industry exit
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