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Discussion Paper Details

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Title: Are Sunk Costs a Barrier to Entry?

Author(s): Luís M B Cabral and Thomas Ross

Publication Date: March 2007

Keyword(s): barriers to entry and sunk costs

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Cabral, L and Ross, T. 2007. 'Are Sunk Costs a Barrier to Entry?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6162