Fixed costs matter even when the costs are sunk

Jurjen Kamphorst, Ewa Mendys-Kamphorst and Bastian Westbrock

Economics Letters, 2020, vol. 195, issue C

Abstract: How firms set prices is key to understanding markets. Standard economics dictates that the fixed costs of a firm should not affect its prices. Nonetheless, it is common practice for firms to raise their prices after a fixed costs increase. We show that firms are correct in doing so if two ubiquitous conditions apply: (i) future profits increase in current sales and (ii) firms are liquidity-constrained.

Keywords: Sunk costs; Liquidity constraints; Switching costs; Pricing (search for similar items in EconPapers)
JEL-codes: D42 L11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:195:y:2020:i:c:s0165176520302688

DOI: 10.1016/j.econlet.2020.109428

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