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On the Effects of Sunk Costs

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  • W. Bentley MacLeod

Abstract

This paper studies the effect of sunk cost on equilibria for a dynamic oligopoly with entry. Sunk costs are a hysteresis effect that cannot be adequately modelled in a static framework. When sunk costs are added to a dynamic model they do not act as a barrier to entry, contrary to general perception. Using the subgame perfect Nash equilibrium concept shows that as the fraction of costs that are sunk rises, the number of entrants rise and profits per firm fall.

Suggested Citation

  • W. Bentley MacLeod, 1984. "On the Effects of Sunk Costs," Working Paper 555, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:555
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    Cited by:

    1. Macleod, W. Bentley, 1985. "A theory of conscious parallelism," European Economic Review, Elsevier, vol. 27(1), pages 25-44, February.

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