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Sunk Costs, Accommodation, and the Welfare Effects of Entry


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


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

Suggested Citation

  • Nachbar, John H & Petersen, Bruce C & Hwang, Inhak, 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:317-32

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    References listed on IDEAS

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    5. MacLeod, W B & Norman, G & Thisse, J-F, 1987. "Competition, Tacit Collusion and Free Entry," Economic Journal, Royal Economic Society, vol. 97(385), pages 189-198, March.
    6. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-137, March.
    7. Lars-Hendrik Röller & Mihkel M. Tombak, 1993. "Competition and Investment in Flexible Technologies," Management Science, INFORMS, vol. 39(1), pages 107-114, January.
    8. Norman, George & Thisse, Jacques-Francois, 1996. "Product Variety and Welfare under Tough and Soft Pricing Regimes," Economic Journal, Royal Economic Society, vol. 106(434), pages 76-91, January.
    9. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    10. Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
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    13. Chang, Myong-Hun, 1993. "Flexible Manufacturing, Uncertain Consumer Tastes, and Strategic Entry Deterrence," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 77-90, March.
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    Cited by:

    1. Cellini, Roberto & Lambertini, Luca & Ottaviano, Gianmarco I. P., 2004. "Welfare in a differentiated oligopoly with free entry: a cautionary note," Research in Economics, Elsevier, vol. 58(2), pages 125-133, June.
    2. Amir, Rabah & De Castro, Luciano & Koutsougeras, Leonidas, 2014. "Free entry versus socially optimal entry," Journal of Economic Theory, Elsevier, vol. 154(C), pages 112-125.
    3. L. Lambertini & G. Rossini, 2000. "Excess Capacity in Oligopoly with Sequential Entry," Working Papers 384, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. 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.
    5. T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.
    6. 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.
    7. Manuel Willington & Fabián Basso, 2006. "Regulación, 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.

    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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