A model of international entry and exit with endogenous sunk costs in vertical markets

This chapter introduces the Cournot framework with endogenous sunk costs to extend traditional models of vertical markets in international trade. This is done by introducing market access costs as highlighted by Owen and Ulph (Rev Int Econ 1093:539-555, 2002). The authors develop a baseline and benchmark model to examine the strategic role of access costs as endogenous sunk costs by incumbents for forestalling entry. In the model, foreign entry in the downstream and domestic retail market under incomplete information is examined. Incumbent firms are fully informed about the cost of production as well as their chosen market access costs while the foreign (potential) entrant does not possess the full information on costs. The incumbents select a pre-entry price while potential entrant infers the cost conditions from price statistic.