International Journal of Industrial Organization 16 (1998) 139–168 Sunk costs and regulation in the U.S. pesticide industry 1 * Michael Ollinger , Jorge Fernandez-Cornejo Economic Research Service, U.S. Department of Agriculture, 1301 New York Ave., NW , Washington, D.C., 20005, USA Abstract This paper examines the impact of sunk costs and market demand on the number of innovative companies, the U.S. market share of foreign-based firms, and merger choice in the U.S. Pesticide Industry. Results are consistent with Sutton’s (1991) view of sunk costs and market structure in that rising endogenous sunk research costs and exogenous sunk pesticide product regulation costs and declining demand negatively affect the number of firms in the industry, have a stronger negative impact on the number of smaller firms, and encourage foreign-based firm expansion.  1998 Elsevier Science B.V. Keywords: Sunk costs; Pesticide regulation; Market structure JEL classification: L11 1. Introduction Sutton (1991) proposes that sunk costs, market demand, and the toughness of price competition determine market structure. He observes that sunk costs can either be exogenous or endogenous. Exogenous sunk costs, such as the capital costs of production, are incurred by all entrants to an industry and depend on the nature of the underlying technology. Endogenous sunk costs, such as advertising * Corresponding author. 1 The authors are economists at the United States Department of Agriculture, Economic Research Service, 1800 M Street, NW,Washington, D.C., 20036. Some of this work was completed at the Center for Economic Studies at the Bureau of the Census. 0167-7187 / 98 / $19.00  1998 Elsevier Science B.V. All rights reserved. PII S0167-7187(96)01049-1