Sunk Costs, Accommodation, and the Welfare Effects of Entry

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Title: Sunk Costs, Accommodation, and the Welfare Effects of Entry
Author(s): John H. Nachbar, Bruce C. Petersen, and Inhak Hwang
Volume: 46 (3)
Issue: September 1998
Pages: 317-332
Abstract: Although economists usually support the unrestricted entry of firms into an industry, entry may lower social welfare if there are setup costs or if entrants have a cost disadvantage. We consider the welfare effects of entry within a standard Cournot model where some of an incumbent firm's costs are sunk. We find that the range of parameter values over which entry can harm welfare declines monotonically in the fraction of costs that are sunk. Furthermore, the presence of even a small fraction of sunk costs often reverses an assessment that entry harms welfare.

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Last modified 26/08/2010