Sunk costs, entry and clustering

47 Pages Posted: 6 Dec 2021 Last revised: 16 Jan 2024

See all articles by Alexander Matros

Alexander Matros

Moore School of Business

Vladimir Smirnov

The University of Sydney - School of Economics

Andrew Wait

University of Sydney

Date Written: November 26, 2021

Abstract

We outline the conditions for efficient entry order and clustering in a triopoly preemption game in which firms differ in their sunk costs of entry. The critical factor turns out to be how symmetric the potential entrants are. If the cost asymmetry between the firms is sufficiently large, entry is always in the efficient order. On the other hand, if firms are relatively symmetric, entry order can be inefficient in that the firm with the second-lowest entry cost enters first. Furthermore, if there is any difference in entry costs between the two most efficient firms, there is never clustering (which is when firms enter the market at the same time). Lastly, in contrast to the case with relatively symmetric firms, when the cost asymmetry between firms is large, the leader's entry time in the triopoly is always earlier than it is in a duopoly.

Keywords: timing games, asymmetric firms, clustering, inefficient entry

JEL Classification: C72, L13, O31, O33

Suggested Citation

Matros, Alexander and Smirnov, Vladimir and Wait, Andrew, Sunk costs, entry and clustering (November 26, 2021). Available at SSRN: https://ssrn.com/abstract=3978206 or http://dx.doi.org/10.2139/ssrn.3978206

Alexander Matros

Moore School of Business ( email )

1014 Greene St
Columbia, SC 29208
United States

Vladimir Smirnov

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

Andrew Wait (Contact Author)

University of Sydney ( email )

School of Economics
University of Sydney, NSW 2006
Australia
+61-2-9351-3060 (Phone)
+61-2-9351-4341 (Fax)

HOME PAGE: http://sydney.edu.au/arts/economics/

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