SUNK COST AND FIRMS' INVESTMENT DECISIONS IN THE ITALIAN DOMESTIC APPLIANCE INDUSTRY

Sara BARTOLUCCI (University of Urbino )
Marco CUCCULELLI (University of Urbino )

The paper uses the Haskel Scaramozzino (1997) framework in order to test the Sutton "sunk costs hypothesis" in the Italian domestic appliance industry. Preliminary econometric results confirm the expected relationship between market share and profit margin, but this effect is reduced when sunk costs are taken into account. In particular, empirical tests provide evidence for R&D and advertising acting as a substitute for market share in shaping firms' profit function. Controlling for company financial status and leader/follower behaviour provides further evidence on the relevance of sunk costs in the Italian domestic appliance industry.