Sunk Entry Costs, Sunk Depreciation Costs, and Industry Dynamics

Posted by D. Daniel Sokol

Adelina Gschwandtner (U. Vienna - Econ) and Val E. Lambson (BYU - Econ) have written on Sunk Entry Costs, Sunk Depreciation Costs, and Industry Dynamics

Abstract: Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.