---
id: "prereq-sunk-costs"
type: "prereq"
source_timestamps: ["§ Boundary Conditions Matter"]
tags: ["microeconomics", "barriers-to-entry"]
related: ["claim-sunk-costs-favor-focused"]
sources: ["tail1"]
sourceVaultSlug: "hbr-seg-tail1"
originDay: 1
articleStem: "hbr-tail-116-winner-take-all-diversification"
sourceUrl: "https://hbr.org/2026/04/in-winner-take-all-markets-diversification-is-a-liability"
sourceTitle: "In Winner-Take-All Markets, Diversification Is a Liability"
---
# Economics of Sunk Costs

## Prerequisite: Economics of Sunk Costs

**Why you need it:** To grasp why high investment requirements can favor *focused* firms, you must understand how unrecoverable investments alter strategic decision-making and commitment credibility.

This background is what makes [[claim-sunk-costs-favor-focused]] and the contrarian insight [[contrarian-high-barriers-favor-focused]] intelligible. The counterintuitive move is that a cost you *cannot recover* becomes a *commitment asset*: it removes the option to walk away, strengthening the do-or-die signal at the heart of the [[concept-commitment-paradox]].

### Key idea (enrichment)

In classic industrial-organization models, irreversible investment can *deter* entry precisely because it commits the incumbent. The source's twist is to apply the same logic to a *focused* startup vs. a diversified conglomerate — a relative-commitment argument rather than a pure deep-pockets argument.