Endogenous Market Structures and Innovation

One of the pioneering works on endogenous market structures, by Tandon (1984), has extended the standard Cournot model with linear demand to endogenous entry and sunk R&D costs to show that the endogenous number of firms is independent from the size of the market. I generalize the model in many directions and show that, as long as the exogenous fixed costs are positive, the endogenous market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton (1991).Oligopoly, Endogenous entry, Sunk costs, RD investment