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Sunk Costs, Accommodation, and the Welfare Effects of Entry

Author

Listed:
  • John H. Nachbar
  • Bruce C. Petersen
  • Inhak Hwang

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. We consider the welfare effects of entry within a standard Cournot model where some of an incumbent firm’s costs are sunk. We find that the range of parameter values over which entry can harm welfare declines monotonically in the fraction of cost that are sunk. Furthermore, the presence of even a small fraction of sunk costs often reverses an assessment that entry harms welfare.

Suggested Citation

  • John H. Nachbar & Bruce C. Petersen & Inhak Hwang, 1998. "Sunk Costs, Accommodation, and the Welfare Effects of Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(3), pages 317-332, September.
    • Handle: RePEc:bla:jindec:v:46:y:1998:i:3:p:317-332
    DOI: 10.1111/1467-6451.00074
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    Cited by:

    1. Chi-Chih Lin, 2016. "Can Total Deregulation Be A Better Option Than Partial Deregulation?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-16, September.
    2. Manuel Willington & Fabián Basso, 2006. "Regulación, Cobertura y Competencia en el Mercado de la Banda Ancha," ILADES-UAH Working Papers inv177, Universidad Alberto Hurtado/School of Economics and Business.
    3. L. Lambertini & G. Rossini, 2000. "Excess Capacity in Oligopoly with Sequential Entry," Working Papers 384, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Rupayan Pal & Marcella Scrimitore & Ruichao Song, 2023. "Externalities, entry bias, and optimal subsidy policy for cleaner environment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 90-122, February.
    5. 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.
    6. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.

    More about this item

    JEL classification:

    • 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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