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Pham Hoang Van, David D. VanHoose, 2013. "Regulatory Versus Natural Endogenous Sunk Costs: Observational Equivalence In Rationalizing Lower Bounds On Industry Concentration"
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| Abstract: |
| We propose a theory of `regulatory endogenous sunk costs'
(RESC), in which a captured regulator raises minimum quality
standards when market size increases in order to protect incumbent
rms. Our RESC theory's predictions that market size is unrelated to
industry concentration and positively related to product quality are
observationally equivalent to those of Sutton's theory of `natural
endogenous sunk costs' (NESC), in which incumbents increase quality
investments to compete for a share of a growing market. The NESC
theory suggests that, with higher entry costs, incumbents jockey for
increased market shares by increasing quality investments. The RESC
theory, however, predicts that product quality should be lower with
higher entry costs. Entry costs and minimum quality standards each
provide incumbents with protection from pro t erosions that entry
otherwise would produce. A key implication of our analysis is the
possibility that some industries might be misclassi ed as natural
oligopolies. We provide a few examples of candidate RESC industries. |
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