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Entry, Sunk Costs, and Market Structure

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  • W. Bentley MacLeod

Abstract

Typically, models that study the role of sunk costs suppose that incumbent firms face entry by a single firm each period. In this paper, the set of equilibrium market structures that result when all firms are free to enter or exit and set prices each period are characterized. The effect of sunk costs on the market structure is examined and it is shown that sunk costs can take on various forms, each having a different effect on the set of equilibrium market structures. Costs that are sunk due to the existence of product- specific capital do not in general deter entry. Rather, entry deterrence is a necessary outcome only when costs are sunk due to the time it would take to leave the market.

Suggested Citation

  • W. Bentley MacLeod, 1987. "Entry, Sunk Costs, and Market Structure," Canadian Journal of Economics, Canadian Economics Association, vol. 20(1), pages 140-151, February.
    • Handle: RePEc:cje:issued:v:20:y:1987:i:1:p:140-51
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    Cited by:

    1. Andersson, Fredrik & Skogh, Goran, 2003. "Quality, self-regulation, and competition: the case of insurance," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 267-280, April.
    2. Chang, Cheng-wei & Lai, Ching-chong, 2012. "Markups and the number of firms in a simple model of imperfect competition," Economics Letters, Elsevier, vol. 116(3), pages 277-280.
    3. Cairns, Robert D., 1996. "Uncertain contestability," Journal of Economic Behavior & Organization, Elsevier, vol. 30(1), pages 125-131, July.
    4. Marc Escrihuela-Villar & Jorge Guillen, 2011. "On Collusion and Industry Size," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 31-40, May.

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