Endogenous Sunk Costs, Quality Competition and Welfare: A Technical Note

Abstract

Quality competition, by increasing sunk costs, may produce levels of concentration even higher than expected in its absence. Based on Sutton's model of endogenous sunk costs and quality competition, we show that consumers, under certain conditions, may benefit from higher industry concentration driven by an increase in endogenous sunk costs despite the effects on concentration and likely attenuation of price competition.