Abstract:We introduce spillover e¤ect into John Sutton's (1991,1998) concept of endogenous sunk costs. These sunk costs appear in the form of R&D investment into quality in our framework. We show that with spillovers increasing and the e¤ectiveness of investment in raising quality decreasing, the Sutton lower bound on concentration for an industry decreases and ultimately collapses to zero when spillovers are large enough and/or e¤ectiveness of investment in raising quality is low enough. In the second part, we allow …… Show more
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