Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly

William Baumol and Robert Willig

The Quarterly Journal of Economics, 1981, vol. 96, issue 3, 405-431

Abstract: This paper shows that (i) fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist—prices making him invulnerable against entry; (ii) nevertheless, fixed costs do not constitute barriers to entry; that is, they need not have undesirable welfare consequences; (iii) indeed, in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium; (iv) sunk costs do, however, constitute barriers to entry; and (v) finally, the profit and welfare consequences of entry barriers are described formally.

Date: 1981
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