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Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly

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  • William J. Baumol
  • Robert D. Willig

Abstract

This paper shows that (i) fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist—prices making him invulnerable against entry; (ii) nevertheless, fixed costs do not constitute barriers to entry; that is, they need not have undesirable welfare consequences; (iii) indeed, in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium; (iv) sunk costs do, however, constitute barriers to entry; and (v) finally, the profit and welfare consequences of entry barriers are described formally.

Suggested Citation

  • William J. Baumol & Robert D. Willig, 1981. "Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(3), pages 405-431.
    • Handle: RePEc:oup:qjecon:v:96:y:1981:i:3:p:405-431.
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