What are sunk Costs

Explain how sunk costs create a barrier to entry into the marketplace.

Sunk costs refer to amounts of money that a company has already spent in its business activities and cannot be recovered. They include the costs of starting and doing business that is not included in the future decisions of the firm.  Businesses have to spend money to make money. The costs of things such as machinery and leasing a factory for production are an example of sunk costs. They cannot be recovered at any time in the future but they are used to help the businesses as it provides services and goods to its consumers.

Sunk costs can be a barrier to entry in a market place depending on their nature. When the sunk costs are above the acceptable market levels, the market will be less contestable compared to when the sunk costs are insignificant. Competition is greater when the sunk costs are lower because there are fewer barriers to entry in the market place. On the other hand, high sunk costs act as a barrier to entry in the market for new firms. The rationale is that such firms will be afraid that they will go through huge losses if they decide to leave the market. The sunken costs that will be incurred will be high and therefore leaving the market due to product failure or failure to achieve the set objectives.

Some industries have low market costs and thus the competition is high and barriers to entry are very low. Such include the fast-food industry, beauty, and hairdressing industry among others. On the contrary other industries such as manufacturing find it costly to leave the market or enter the market due to sunk costs. The sunk costs losses could be caused by asset write-off; where expenses are associated with the writing off of machinery and plants. It could also be as a result of the closure of a project leading to redundancy costs and penalty costs or the loss of business reputation and goodwill.

Looking to get Essay writing help for this assignment? Get custom essay for 15% OFF using coupon code “NEW15” or Buy Used Solution for same paper for less!