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Fixed costs matter even when the costs are sunk

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  • Kamphorst, Jurjen
  • Mendys-Kamphorst, Ewa
  • Westbrock, Bastian

Abstract

How firms set prices is key to understanding markets. Standard economics dictates that the fixed costs of a firm should not affect its prices. Nonetheless, it is common practice for firms to raise their prices after a fixed costs increase. We show that firms are correct in doing so if two ubiquitous conditions apply: (i) future profits increase in current sales and (ii) firms are liquidity-constrained.

Suggested Citation

  • Kamphorst, Jurjen & Mendys-Kamphorst, Ewa & Westbrock, Bastian, 2020. "Fixed costs matter even when the costs are sunk," Economics Letters, Elsevier, vol. 195(C).
    • Handle: RePEc:eee:ecolet:v:195:y:2020:i:c:s0165176520302688
    DOI: 10.1016/j.econlet.2020.109428
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    References listed on IDEAS

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    More about this item

    Keywords

    Sunk costs; Liquidity constraints; Switching costs; Pricing;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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