SUNK COSTS, ACCOMMODATION, AND THE WELFARE EFFECTS OF ENTRY

Although economists usually support the unrestricted entry of firms in to an industry, entry may lower social welfare if there are setup cost s or if entrants have a cost disadvantage. We consider the welfare eff ects of entry within a standard Cournot model where some of an incumbe nt firm's costs are sunk. We find that the range of parameter values o ver which entry can harm welfare declines monotonically in the fractio n of cost that are sunk. Furthermore, the presence of even a small fra ction of sunk costs often reverses an assessment that entry harms welf are.