Are Sunk Costs a Barrier to Entry?

Luis Cabral and Thomas Ross

No 19, Working Papers from Portuguese Competition Authority

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.

Pages: 18 pages
Date: 2007-02
New Economics Papers: this item is included in nep-bec, nep-com, nep-ent, nep-ind, nep-mic and nep-tid
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Related works:
Journal Article: Are Sunk Costs a Barrier to Entry? (2008)
Working Paper: Are Sunk Costs a Barrier to Entry? (2007)
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