Sunk Costs and Market Structure: Price Competition Advertising and the Evolution of Concentration Book

"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, MIT Sunk Costs and Market Structure bridges the gap between the new generation of game-theoretic models, which have 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 reëxamines the traditional agenda of the subject. 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 it is these results that should be taken into account when looking for statistical regularities across a broad spectrum of industries. These statistical regularities follow from basic constraints on equilibrium structure, which depend only on very general industry characteristics. Within the range of outcomes admitted by these constraints, a wide range of possible scenarios exist that are consistent with the theory, and the particular outcome that emerges will be heavily conditioned by the idiosyncratic features of the individual markets. The empirical implementation of this kind of theory demands an unusual blend of econometric and historical analysis. 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.Read More