Sunk Costs, Market Structure And Welfare: A General Equilibrium Interpretation

This paper develops a general equilibrium model with the purpose of identifying fundamental determinants of market structure and their welfare impact. The main effects are derived from the interaction between horizontal and vertical differentiation, induced by different sets of exogenous and endogenous sunk costs. The former are found to be positively correlated with market concentration and market power, but their relation to welfare approaches an inverted U-shaped curve. On the other hand, endogenous sunk costs parameters are found to be positively correlated with market concentration, but negatively with market power, as long as no price coordination takes place. Their relation to welfare approaches a U-shaped curve. These results carry important policy implications, detailing new reasons why simple concentration indicators are not a sufficient statistic for welfare evaluations. The model also suggests new tools in order to improve these assessments., making use of observable variables to proxy for unobservable determinants.