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Some thoughts on the Sutton approach

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  • Federico Etro
Abstract
I analyze the relation between market size and number of firms when an endogenous number of firms chooses the market strategy and (simultaneously or sequentially) an R&D investment. I generalize the linear Cournot model with an endogenous cost-reducing activity and show that, as long as exogenous fixed costs are positive, the market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton. However, the increase of the market size reduces the prices and expands individual investment and production exactly as in endogenous market structure only with exogenous fixed costs. Copyright Springer-Verlag Wien 2014

Suggested Citation

  • Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.
    • Handle: RePEc:kap:jeczfn:v:112:y:2014:i:2:p:99-113
    DOI: 10.1007/s00712-013-0349-1
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    References listed on IDEAS

    as
    1. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, March.
    2. Paul B. Ellickson, 2007. "Does Sutton apply to supermarkets?," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 43-59, March.
    3. Hiroaki Ino & Toshihiro Matsumura, 2012. "How Many Firms Should Be Leaders? Beneficial Concentration Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1323-1340, November.
    4. Kovác, Eugen & Vinogradov, Viatcheslav & Zigic, Kresimir, 2010. "Technological leadership and persistence of monopoly under endogenous entry: Static versus dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1421-1441, August.
    5. Federico Etro, 2011. "Endogenous Market Structures And Strategic Trade Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 63-84, February.
    6. Federico Etro, 2008. "Stackelberg Competition with Endogenous Entry," Economic Journal, Royal Economic Society, vol. 118(532), pages 1670-1697, October.
    7. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
    8. Krešimir Žigić, 2012. "Stackelberg leadership with product differentiation and endogenous entry: some comparative static and limiting results," Journal of Economics, Springer, vol. 106(3), pages 221-232, July.
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    11. Paolo Bertoletti & Federico Etro, 2013. "Monopolistic Competition: A Dual Approach with an Application to Trade," Working Papers 2013:09, Department of Economics, University of Venice "Ca' Foscari".
    12. Senyuta, Olena & Žigić, Krešimir, 2016. "Managing spillovers: An endogenous sunk cost approach," Information Economics and Policy, Elsevier, vol. 35(C), pages 45-64.
    13. Etro, Federico, 2011. "Endogenous market structures and contract theory: Delegation, principal-agent contracts, screening, franchising and tying," European Economic Review, Elsevier, vol. 55(4), pages 463-479, May.
    14. Federico Etro & Michela Cella, 2013. "Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 488-512, September.
    15. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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    22. Cato, Susumu & Matsumura, Toshihiro, 2013. "Merger and entry-license tax," Economics Letters, Elsevier, vol. 119(1), pages 11-13.
    23. Tandon, Pankaj, 1984. "Innovation, Market Structure, and Welfare," American Economic Review, American Economic Association, vol. 74(3), pages 394-403, June.
    24. Federico Etro, 2012. "Endogenous Market Structures and Welfare," Working Papers 2012_12, Department of Economics, University of Venice "Ca' Foscari".
    25. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    26. R. J. Ruffin, 1971. "Cournot Oligopoly and Competitive Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(4), pages 493-502.
    27. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 833-882.
    28. Dirk Czarnitzki & Federico Etro & Kornelius Kraft, 2014. "Endogenous Market Structures and Innovation by Leaders: An Empirical Test," Economica, London School of Economics and Political Science, vol. 81(321), pages 117-139, January.
    29. Federico Etro, 2012. "The Theory of Endogenous Market Structures: A Survey," Working Papers 2012_11, Department of Economics, University of Venice "Ca' Foscari".
    30. Federico Etro, 2009. "Endogenous Market Structures and the Macroeconomy," Springer Books, Springer, number 978-3-540-87427-0, December.
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    Cited by:

    1. Yuichiro Matsumoto, 2018. "Endogenous Sunk Cost, Scale Economies, and Market Concentration," Discussion Papers in Economics and Business 18-20, Osaka University, Graduate School of Economics.
    2. Azamat Valei, 2017. "Advertising Response to New Entry," CERGE-EI Working Papers wp588, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Matsumura, Toshihiro & Yamagishi, Atsushi, 2017. "Long-run welfare effect of energy conservation regulation," Economics Letters, Elsevier, vol. 154(C), pages 64-68.
    4. Senyuta, Olena & Žigić, Krešimir, 2016. "Managing spillovers: An endogenous sunk cost approach," Information Economics and Policy, Elsevier, vol. 35(C), pages 45-64.

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    More about this item

    Keywords

    Endogenous entry; Sunk costs; R&D investment; L1;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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