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Testing for Endogenous Sunk Costs in the Retail Industry

Roman, Hernan (2010): Testing for Endogenous Sunk Costs in the Retail Industry.

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This paper uses data from retail industries in Chile to test Shaked and Sutton's (1987) hypothesis of endogenous sunk costs. I find that industries which are less likely to have endogenous sunk costs display a signicant negative relationship between market size and concentration. In contrast, in the supermarket industry, where investment in advertising is presumed to be more intense, the tests show that concentration does not vary with market size and is bounded away from zero.

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