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Sunk Costs, Accommodation, and the Welfare Effects of Entry

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  • Nachbar, John H
  • Petersen, Bruce C
  • Hwang, Inhak

Abstract

Although 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 Info

Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

Volume (Year): 46 (1998)
Issue (Month): 3 (September)
Pages: 317-32

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Handle: RePEc:bla:jindec:v:46:y:1998:i:3:p:317-32

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Cited by:
  1. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, 06.
  2. 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.
  3. Manuel Willington & FabiĆ”n Basso, 2006. "RegulaciĆ³n, 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.
  4. L. Lambertini & G. Rossini, 2000. "Excess Capacity in Oligopoly with Sequential Entry," Working Papers 384, Dipartimento Scienze Economiche, Universita' di Bologna.

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