International entry and exit with endogenous sunk costs in vertical markets

![CDATA[With the inroduction of endogenous sunk costs in the literature on industrial organisation by Shaked and Sutton (1983; 1982; 1987), Sutton (1991), we now know the importance of entry-exit dyanmics as one of the prime movers of the market structure. In the context of international trade Melitz (2003), by adapting Hopenhayn’s (1992) model of monopolistic competition, has stressed the undeniable roles of entry and exit behaviours of heterogeneous firms, partly driven by endogenous sunk costs, for a better understanding of the time profile of inter-firm relocation in global markets. Ghironi and Meltiz (2005) has explore the macroeconomic consequences of sunk costs in entry when the product market is monopolistically competitive. We introduce an over-simplified Cournot framework with endogenous sunk costs to extend the traditional models of vertical markets (Jones, 1996; 1989; Bernhofen, 1996; Spencer and Jones, 1992; 1991) in international trade. We do so by introducing market access costs as highlighted by Owen and Ulph (2002) in their pioneering work. In this paper we develop a baseline and benchmark model to examine the strategic role of access costs as endogenous sunk costs by incumbents for forestalling entry. In this simplified model we examine foreign entry in the downstream and domestic retail market under incomplete information. 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 the potential entrant infers the cost conditions from this price statistic. We establish that the incumbents can strategically deter foreign entry by an upward distortion of the final good‘s price by approrpiately choosing the market access costs. We show that the incumbents can effectively collude to deter entry if the integrated home firm is free to commit to an access price/cost before entry. We also note that the regulation of theaccess cost/price can often control such anticompetitive price distortion in vertical markets in international trade.]]