Entry, Sunk Costs and Market Structure

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Abstract
Typically, models that study the role of sunk costs suppose that incumbent firms face entry by a single firm each period. In this paper the set of equilibrium market structures that result when all firms are free to enter or exit and set prices each period is studied. The effect of sunk costs on the market structure is examined and it is shown that differing types of sunk cost can have quite different effects on market structure. Costs that are sunk due to the existence of product specific capital do not in general deter entry. Further it is found, contrary to the arguments of Baumol, Panzar and Willig (1982), that the freedom to enter and leave a market does not suggest that firms will earn zero profits in equilibrium.
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