One of the market games studies the impact of sunk costs and capacity constraints on firms’ prices and profits. After a few iterations,

1. prices and profits explode on the market with a very low production capacity
2. sunk costs have nearly no influence on prices
3. fixed avoidable costs may have an impact on price when one of the player leaves the market
4. prices and profits are lower when production capacities are more important

 

Below is another graph, from a shorter session, illustrating the evolution of prices at the start of the game:

In the beginning students usually chose higher price on markets with higher fixed costs, making no distinction between avoidable and sunk costs (yellow and red). They also chose about the same price on the markets with moderate capactity constraints and with very low constraints (blue and pruple). After a few iterations, prices on the market with sunk costs (red) decreased and reached the same level as on the market with no sunk costs (light blue). Prices on the market with very low capacity constraints (purple) decreased much below the market with moderate capacity constraints (light blue). As usual, Prices soar on the market very very strong capacity constraints.

 

 

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