Are Sunk Costs a Barrier to Entry?

Luis Cabral and Thomas Ross

No 6162, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The received wisdom is that sunk costs create a barrier to entry - if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.

Keywords: Barriers to entry; Sunk costs (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-ent, nep-ind, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cepr.org/publications/DP6162 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Are Sunk Costs a Barrier to Entry? (2008)
Working Paper: Are Sunk Costs a Barrier to Entry? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6162

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6162

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().