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Sunk Costs and Risk-Based Barriers to Entry

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  • Robert S. Pindyck

Abstract

In merger analysis and other antitrust settings, risk is often cited as a potential barrier to entry. But there is little consensus as to the kinds of risk that matter - systematic versus non-systematic and industry-wide versus firm-specific - and the mechanisms through which they affect entry. I show how and to what extent different kinds of risk magnify the deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics, concentration, and equilibrium market prices. To do this, I develop a measure of the "full," i.e., risk-adjusted, sunk cost of entry. I show that for reasonable parameter values, the full sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets.

Suggested Citation

  • Robert S. Pindyck, 2009. "Sunk Costs and Risk-Based Barriers to Entry," NBER Working Papers 14755, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14755
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    References listed on IDEAS

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    Cited by:

    1. Ia Vardishvili, 2020. "Entry Decision, the Option to Delay Entry, and Business Cycles," Auburn Economics Working Paper Series auwp2020-07, Department of Economics, Auburn University.
    2. Theodore H. Moran, 2013. "Avoiding the "Resource Curse" in Mongolia," Policy Briefs PB13-18, Peterson Institute for International Economics.
    3. Olender-Skorek, Magdalena, 2012. "To Regulate Or Not to Regulate? – Economic Approach to Indefeasible Right of Use (IRU)," MPRA Paper 48548, University Library of Munich, Germany.
    4. Bustamante, Maria Cecilia & Zucchi, Francesca, 2023. "Innovation, industry equilibrium, and discount rates," Working Paper Series 2835, European Central Bank.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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