Sunk Costs and Market Structure ― Price Competition, Advertising, and the Evolution of Concentration

Sunk Costs and Market Structure bridges the gap between the new generation of gametheoretic models that has dominated the industrial organization literature over the past ten yearsand the traditional empirical agenda of the subject as embodied in the structure-conduct-performanceparadigm developed by Joe S. Bain and his successors.The new theoretical literature has engenderedpessimism in recent years because many results turn out to depend on detailed features of the marketthat are difficult to measure. This has led many observers to argue that the new literature offerslittle basis for the kind of cross-industry studies that have formed the empirical base of thesubject since the 1950s. Using current game-theoretic methods, John Sutton reexamines thetraditional agenda. He argues that despite the "delicate" nature of many results, there aretheoretical predictions that turn out to be extremely robust to reasonable changes in modelspecification, and these results should be taken into account when looking for statisticalregularities across a broad spectrum of different industries.Sutton draws on a wide range ofhistorical sources and on an intensive program of company interviews to assemble a matrix ofindustry 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. Hecombines theory, econometric evidence, and a detailed account of the various patterns of evolutionof structure found in these industries in a rigorous evaluation of the strengths and limitations ofa game-theoretic approach in explaining the evolution of industrial structure.John Sutton isProfessor of Economics at the London School of Economics.