Xiao, Mo; Orazem, Peter

International Journal of Industrial Organization Vol. 29 no. 5 (September 2011): 547-561.

We study the importance of sunk costs in determining entry conditions and inferences about firm conduct in an adapted Bresnahan and Reiss (1991, 1994) framework. In our framework, entrants incur sunk costs to enter, while incumbents disregard these costs in deciding on continuation or exit. We apply this framework to study entry and competition in the local U.S. broadband markets from 1999 to 2003. Ignoring sunk costs generates unreasonable variation in firms’ competitive conduct over time. This variation disappears when entry costs are allowed. Once the market has one to three incumbent firms, the fourth entrant has little effect on competitive conduct.

JEL Classification: L13, L8

Keywords: entry, market structure, Sunk Costs, Broadband Market

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