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Are Sunk Costs a Barrier to Entry?
Author(s) -
Cabral Luís M. B.,
Ross Thomas W.
Publication year - 2008
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2008.00172.x
Subject(s) - sunk costs , commit , context (archaeology) , barriers to entry , economics , microeconomics , industrial organization , business , market structure , computer science , paleontology , database , biology
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.