Endogenous mergers in endogenous sunk cost industries

This paper uses an endogenous coalition formation game to derive an upper bound to industry concentration. The proposed coalitional stability concept assumes that firms are endowed with foresight in that they look ahead and anticipate the ultimate outcome of their actions. It is shown that while in exogenous sunk cost industries the upper bound to concentration falls as the market becomes large, in endogenous sunk cost industries, regardless of the size of the market, arbitrarily concentrated outcomes can arise in equilibrium. In addition, for this second class of industries, if products are sufficiently good substitutes, then duopoly coalition structures can only be sustained in equilibrium if composed of sufficiently size asymmetric coalitions. The results, therefore, complement those of Sutton [Sutton, J. 1991, Sunk Costs and Market Structure, Cambridge, MA: MIT Press; Sutton, J. 1998, Technology and Market Structure: Theory and History, Cambridge, MA: MIT Press.].