Sunk costs
Definition. Sunk costs are costs that have already been spent and cannot be recovered on exit from a market, for instance outlays on specialised assets or large scale advertising that have no resale value. When entry into an industry requires substantial sunk costs, they act as a barrier to entry.
Potential entrants face the risk of losing these unrecoverable outlays if they later have to leave, which deters entry and helps incumbent firms protect supernormal profit. High sunk costs reduce the contestability of a market.
This term belongs to Barriers to Entry in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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