On the Effects of Sunk Costs
AbstractThis paper studies the effect of sunk cost on equilibria for a dynamic oligopoly with entry. Sunk costs are a hysteresis effect that cannot be adequately modelled in a static framework. When sunk costs are added to a dynamic model they do not act as a barrier to entry, contrary to general perception. Using the subgame perfect Nash equilibrium concept shows that as the fraction of costs that are sunk rises, the number of entrants rise and profits per firm fall.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 555.
Length: 24 pages
Date of creation: 1984
Date of revision:
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