Abstract
This article proposes an extension of Dixit (Q J Econ 104(2):205–228, 1989a, J Polit Econ 97(3):620–638, 1989b) assuming that potential exporting firms benefit from the experience of nearby firms already settled in the foreign market, which allows the sunk entry costs to diminish. The numerical results show that hysteresis (an effect that persists after the cause that brought it about has been removed) is lower than in Dixit’s case. More interestingly, hysteresis is not monotonically increasing with the number of firms. Moreover, decreasing sunk entry costs have a stronger impact on entering than exiting a foreign market. Regarding the market share, exchange rate depreciations hide the positive effect of decreasing sunk entry costs. In contrast, this positive effect dampens the negative effect of exchange rate appreciations.
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Notes
Alternatively, I could use the model of Belke and Göcke (1999, 2001, 2005) for one-time versus permanent uncertainty with only two states: good and bad. These authors base their contribution on a comparative-static and linearized model which permits a much more straightforward economic interpretation of the results and makes deriving policy conclusions much easier. However, Dixit’s model has the advantage that it allows for a more dynamic approach to considering sequential entry-exit decisions of firms.
A good explanation of hysteresis in exports can be found in Belke et al. (2013).
I have also considered the case of decreasing lineal sunk entry costs, \( K^{\prime \prime }\left ( n\right ) =0\) and concave sunk entry costs, \( K^{\prime \prime }\left ( n\right ) <0\) . In general, similar results were found and are available upon request.
In the cases of decreasing lineal sunk entry costs, \(K^{\prime \prime }\left ( n\right ) =0\) and concave sunk entry costs, \(K^{\prime \prime }\left ( n\right ) <0\), hysteresis is monotonically decreasing across firms. Results are available upon request.
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The author gratefully acknowledges financial support from the Spanish Ministry of Education and Science through Project MICINN-ECO2011-25737 and anonymous referees for comments..
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Aray, H. Hysteresis and import penetration with decreasing sunk entry costs. Int Econ Econ Policy 12, 175–188 (2015). https://doi.org/10.1007/s10368-014-0269-8
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DOI: https://doi.org/10.1007/s10368-014-0269-8