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Are Sunk Costs a Barrier to Entry?

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Author Info
Luís Cabral (New York University)
Thomas Ross (University of British Columbia)

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Abstract

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.

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File URL: http://www.concorrencia.pt/download/WP19_CabralRossJan07.pdf
File Format: application/pdf
File Function: First version, 2007
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Publisher Info
Paper provided by Portuguese Competition Authority in its series Working Papers with number 19.

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Length: 18 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:pca:wpaper:19

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Guillermo Caruana & Liran Einav, 2008. "A Theory of Endogenous Commitment," Review of Economic Studies, Blackwell Publishing, vol. 75(1), pages 99-116, 01. [Downloadable!] (restricted)
  2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
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  3. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March. [Downloadable!] (restricted)
  4. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, 06. [Downloadable!]
  5. Lipman, Barton L. & Wang, Ruqu, 2000. "Switching Costs in Frequently Repeated Games," Journal of Economic Theory, Elsevier, vol. 93(2), pages 149-190, August. [Downloadable!] (restricted)
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  6. Kyle Bagwell & Garey Ramey, 1996. "Capacity, Entry, and Forward Induction," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 660-680, Winter. [Downloadable!] (restricted)
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  7. Cabral, Luis M B & Riordan, Michael H, 1997. "The Learning Curve, Predation, Antitrust, and Welfare," Journal of Industrial Economics, Blackwell Publishing, vol. 45(2), pages 155-69, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alex Bryson & Harald Dale-Olsen, 2008. "A Tale of Two Countries: Unions, Closures and Growth in Britain and Norway," CEP Discussion Papers dp0867, Centre for Economic Performance, LSE. [Downloadable!]
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