Are Sunk Costs a Barrier to Entry?
AbstractThe 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.
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Length: 18 pages
Date of creation: Feb 2007
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Other versions of this item:
- 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.
- Cabral, Luís M B & Ross, Thomas, 2007. "Are Sunk Costs a Barrier to Entry?," CEPR Discussion Papers 6162, C.E.P.R. Discussion Papers.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-12 (All new papers)
- NEP-BEC-2007-05-12 (Business Economics)
- NEP-COM-2007-05-12 (Industrial Competition)
- NEP-ENT-2007-05-12 (Entrepreneurship)
- NEP-IND-2007-05-12 (Industrial Organization)
- NEP-MIC-2007-05-12 (Microeconomics)
- NEP-TID-2007-05-12 (Technology & Industrial Dynamics)
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