Abstract: This paper presents empirical evidence consistent with the predictions of the endogenous sunk cost model of
Sutton (1991), with an application to banks. In particular, banking markets remain concentrated regardless of
market size. Given an asymmetric oligopoly where dominant and fringe firms coexist, the number of dominant
banks remains unchanged with market size, with only the number of fringe banks varying across markets. Such
structure is sustained by competitive investments in quality, with the level of quality increasing with market
size and dominant banks providing higher quality than fringe banks. The analysis has implications for antitrust
policy.
Keywords: Market structure, firm strategy, banking
Full paper (1296 KB PDF)
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Last update: April 15, 2003
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