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Sunk Costs and the Entry Decision

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  • T.W. Ross

Abstract

This paper considers the role of sunk costs in the decision to enter a market. Its goal is to provide a policy-relevant approach to the question: when are sunk costs so great as to serve as a barrier to entry? To do this, the model presented nests both a model of pure hit-and-run entry and a simple "lottery-ticket" model of long-term entry in which the entrant knows that entry may or may not ultimately prove successful. It illustrates clearly the strategic differences between sunk and nonsunk fixed costs. The paper also considers the incumbent's problem of choosing between entry deterrence and accommodation. Finally, out of this model comes a measure of the height of the sunk cost barrier to entry that may be useful for competition policy purposes.

Suggested Citation

  • T.W. Ross, 2004. "Sunk Costs and the Entry Decision," Journal of Industry, Competition and Trade, Springer, vol. 4(2), pages 79-93, June.
    • Handle: RePEc:kap:jincot:v:4:y:2004:i:2:p:79-93
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    Cited by:

    1. Luís M. B. Cabral & Thomas W. Ross, 2008. "Are Sunk Costs a Barrier to Entry?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 97-112, March.
    2. Kai Hüschelrath, 2009. "Detection Of Anticompetitive Horizontal Mergers," Journal of Competition Law and Economics, Oxford University Press, vol. 5(4), pages 683-721.

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