Sunk Costs and Risk-Based Barriers to Entry
Name
RiskEntryBarriersWP0209.pdf
Size
950.76 KB
Format
Adobe PDF
Checksum (MD5)
f106298f8c6dec36cfb579426b2effb9
Author(s)
Pindyck, Robert S.
Date Issued
February 13, 2009
Publisher
Cambridge, MA; Alfred P. Sloan School of Mangement, Massachusetts Institute of Technology
Series/Report no.
MIT Sloan School Working Paper;4723-09
Abstract
In merger analysis and other antitrust settings, risk is often cited as a potential
barrier to entry. But there is little consensus as to the kinds of risk that matter— systematic
versus non-systematic and industry-wide versus firm-specific — and the mechanisms through
which they affect entry. I show how and to what extent different kinds of risk magnify the
deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics,
concentration, and equilibrium market prices. To do this, I develop a measure of the “full,”
i.e., risk-adjusted, sunk cost of entry. I show that for reasonable parameter values, the full
sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets.
Subjects
Entry barriers
sunk costs
investment decisions
risk
market power
antitrust
Persistent DSpace Link
