Are Sunk Costs a Barrier to Entry?

18 Pages Posted: 13 Oct 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Thomas W. Ross

University of British Columbia (UBC)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

The received wisdom is that sunk costs create a barrier to entry if entry fails, then the entrant, unable to recover sunk costs, incursgreater 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 moreprofitable when sunk costs are greater.

Suggested Citation

Cabral, Luis M. B. and Ross, Thomas W., Are Sunk Costs a Barrier to Entry? (January 2007). NYU Working Paper No. EC-06-09. Available at SSRN: https://ssrn.com/abstract=1281953

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas W. Ross

University of British Columbia (UBC) ( email )

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

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