Information, Sunk Costs and Entry Equilibria

This paper studies the effect of information and sunk costs on the set of equilibria for a dynamic oligopoly model that incorporates price and entry/exit decisions. Contrary to the accepted view, sunk costs do not act as a barrier to entry, but in general cause excessive entry. When entry and exit is costless either no equilibrium exists or the market is monopolized. Therefore, even in a homogeneous product model, free entry implies neither zero profits nor an efficient allocation of resources.