Are Sunk Costs a Barrier to Entry?

16 Pages Posted: 30 Jan 2008

See all articles by Luís M. B. Cabral

Luís M. B. Cabral

affiliation not provided to SSRN

Thomas W. Ross

University of British Columbia (UBC)

Abstract

The received wisdom is that sunk costs create a barrier to entry if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.

Suggested Citation

Cabral, Luís M. B. and Ross, Thomas W., Are Sunk Costs a Barrier to Entry?. Journal of Economics & Management Strategy, Vol. 17, Issue 1, pp. 97-112, Spring 2008. Available at SSRN: https://ssrn.com/abstract=1088529 or http://dx.doi.org/10.1111/j.1530-9134.2008.00172.x

Luís M. B. Cabral (Contact Author)

affiliation not provided to SSRN

No Address Available

Thomas W. Ross

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

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