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Entry, Sunk Costs and Renegotiation in Duopoly

James Bergin and W. Bentley Macleod
Annales d'Économie et de Statistique
No. 15/16, Dynamiques des marchés et structures industrielles / Market Dynamics and Industrial Structure (Jul. - Dec., 1989), pp. 173-191
Published by: GENES on behalf of ADRES
DOI: 10.2307/20075756
Stable URL: http://www.jstor.org/stable/20075756
Page Count: 19
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Entry, Sunk Costs and Renegotiation in Duopoly
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Abstract

In this paper we examine the relationship between sunk costs, market structure and welfare in a dynamic duopoly model. We consider a model in which two firms make sequential capacity choices and then play a continuous time game in outputs. It is assumed that the equilibria in the quantity choice stage of the game are renegotiation-proof, and study two polar extremes in this set. It is assumed that either firm one or firm two receives all the ex post rents. In both cases we find, in contrast to most previous studies, that low sunk costs are associated with low welfare. /// On examine dans cet article la relation entre les coûts fixes, la structure du marché et le bien-être, dans le cadre d'un modèle dynamique de duopole où les deux entreprises commencent par un choix séquentiel de capacité, puis jouent en temps continu sur les niveaux de production. On suppose que les équilibres à l'étape du choix de capacité sont robustes à la renégociation et on étudie deux cas polaires extêmes parmi ces équilibres. Dans le premier cas, l'entreprise 1 reçoit tous les profits futurs. Dans le second, c'est l'entreprise 2 qui reçoit toutes les rentes. Contrairement aux études antérieures, on trouve que le niveau de bien-être croît avec les coûts fixes.

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