Yvonne Durham, Kevin McCabe, Mark A. Olsen, Stephen Rassenti, and Vernon Smith

"Oligopoly competition in fixed cost environments"
JEL codes: J3, K2, L1, O32, O34
Keywords: cumulative innovation, industrial districts, intellectual property rights, technology spillovers

Abstract: Many industries with avoidable fixed costs face competitive price instability problems in an attempt to maintain profitability. We designed an experimental environment where profitability is eroded by the addition of sunk and avoidable fixed costs. While we cannot reject the hypothesis that sunk fixed costs have no effect on prices, we observe a pattern of price signaling and responses which maintain above normal profits. This success implies that a firm does not have to exit such an industry in order to avoid loses, and may help to explain why some competitive industries appear to maintain an inefficient number of firms.

Pre-publication pdf copy.