ENDOGENOUS SUNK COSTS AND MARKET STRUCTURE: NOTES ON SUTTON’S THEORETICAL ANALYSIS

To explain why many manufacturing indusries have remained higly concentrated even as industry demand increases, john sutton (1991, 1998) has developed the theory of endogenous sunk costs which depends on game-theoretic analyses. sutton’s explanation to this problem is that the levels of spending such as advertising and r&d are not exogenous to the firms, but are the outcomes of the firms’ choices. because, advertising and r&d can both be thought of as sunk costs incurred with a view to enhancing consumer’ willingness-to-pay for the firm’s product(s). in the sutton’s market configuration, the level of these sunk expenditures also determines the toughness of non-price competition mechanism. in this study, sutton’s endogenous sunk cost theory is discussed and evaluated.