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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. 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.

    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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