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Are Sunk Costs a Barrier to Entry?

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  • Luís M. B. Cabral
  • Thomas W. Ross

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." Copyright 2008 Blackwell Publishing.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 17 (2008)
Issue (Month): 1 (03)
Pages: 97-112

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Handle: RePEc:bla:jemstr:v:17:y:2008:i:1:p:97-112

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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References

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  1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  2. John Connor, 2001. "“Our Customers Are Our Enemies”: The Lysine Cartel of 1992–1995," Review of Industrial Organization, Springer, vol. 18(1), pages 5-21, February.
  3. Lipman, Barton L. & Wang, Ruqu, 2000. "Switching Costs in Frequently Repeated Games," Journal of Economic Theory, Elsevier, vol. 93(2), pages 149-190, August.
  4. Kyle Bagwell & Garey Ramey, 1990. "Capacity, Entry and Forward Induction," Discussion Papers 888, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, January.
  6. Cabral, Luis M B & Riordan, Michael H, 1997. "The Learning Curve, Predation, Antitrust, and Welfare," Journal of Industrial Economics, Wiley Blackwell, vol. 45(2), pages 155-69, June.
  7. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  8. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, 06.
  9. Guillermo Caruana & Liran Einav, 2008. "A Theory of Endogenous Commitment," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 99-116.
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Citations

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Cited by:
  1. Pannone, Andrea, 2010. "Production, unemployment and wage flexibility in an ICT-assisted economy: A model," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 219-230, August.
  2. Alex Bryson & Harald Dale-Olsen, 2008. "A Tale of Two Countries: Unions, Closures and Growth in Britain and Norway," CEP Discussion Papers dp0867, Centre for Economic Performance, LSE.
  3. Ioannis Kessides & Li Tang, 2010. "Sunk Costs, Market Contestability, and the Size Distribution of Firms," Review of Industrial Organization, Springer, vol. 37(3), pages 215-236, November.
  4. Robert S. Pindyck, 2009. "Sunk Costs and Risk-Based Barriers to Entry," NBER Working Papers 14755, National Bureau of Economic Research, Inc.

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