Sunk Costs, Accommodation, and the Welfare Effects of Entry
AbstractAlthough economists usually support the unrestricted entry of firms into an industry, entry may lower social welfare if there are setup costs or if entrants have a cost disadvantage. The authors consider the welfare effects of entry within a standard Cournot model where some of an incumbent firm's costs are sunk. They find that the range of parameter values over which entry can harm welfare declines monotonically in the fraction of costs that are sunk. Furthermore, the presence of even a small fraction of sunk costs often reverses an assessment that entry harms welfare. Copyright 1998 by Blackwell Publishing Ltd
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Industrial Economics.
Volume (Year): 46 (1998)
Issue (Month): 3 (September)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821
Other versions of this item:
- Sachbar, J.H. & Peterson, B.C. & Hwang, I., 1997. "Sunk Costs, Accommodation, and the Welfare Effects of Entry," Washington University 97-03, Business, Law and Economics Center, John M. Olin School of Business, Washington University.
- D60 - Microeconomics - - Welfare Economics - - - General
- K20 - Law and Economics - - Regulation and Business Law - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
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- L. Lambertini & G. Rossini, 2000. "Excess Capacity in Oligopoly with Sequential Entry," Working Papers 384, Dipartimento Scienze Economiche, Universita' di Bologna.
- Lee, Sanghack & Cheong, Kiwoong, 2005. "Rent dissipation and social benefit in regulated entry contests," European Journal of Political Economy, Elsevier, vol. 21(1), pages 205-219, March.
- T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, 06.
- Manuel Willington & Fabián Basso, 2006. "Regulación, Cobertura y Competencia en el Mercado de la Banda Ancha," ILADES-Georgetown University Working Papers inv177, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
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