"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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Paper
Luis M.B. Cabral & Thomas Ross, 2006.
"Are Sunk Costs A Barrier To Entry?,"
Working Papers
06-09, New York University, Leonard N. Stern School of Business, Department of Economics.
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