Title: Fixed Cost, Marginal Cost, and Market Structure
Abstract: The paper examines the impact of cost-reducing expenditures on output, profit, and number of firms under alternative market structures. A unique feature of the model is that it explicitly introduces a function linking reduction in marginal cost to an increase infixed expenditures and allows the firm to choose a profit-maximizing level of fixed costs. This results in a better representation of long-run equilibrium than earlier studies, which treat fixed cost as exogenous. The model considers both blocked and free entry. Output and profit under blocked entry are found to be sensitive to both vertical and horizontal market growths. The principle finding is that the optimal choice of fixed costs results in the equilibrium number of firms being more sensitive to vertical market growth than had previously been thought.
Publication Year: 2001
Publication Date: 2001-01-01
Language: en
Type: article
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Cited By Count: 1
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