Sunk Costs and Real Options in Antitrust

Pindyck, Robert

Sunk Costs and Real Options in Antitrust

Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management

Abstract: Sunk costs play a central role in antitrust economics, but are often misunderstood and mismeasured. I will try to clarify some of the conceptual and empirical issues related to sunk costs, and explain their implications for antitrust analysis. I will be particularly concerned with the role of uncertainty. When market conditions evolve unpredictably (as they almost always do), firms incur an opportunity cost when they invest in new capital, because they give up the option to wait for the arrival of new information about the likely returns from the investment. This option value is a sunk cost, and is just as relevant for antitrust analysis as the direct cost of a machine or a factory.

Keywords: Sunk costs; real options; investment decisions; antitrust; entry barriers; market power; mergers (search for similar items in EconPapers)
Date: 2005-07-29
New Economics Papers: this item is included in nep-com, nep-ent, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Sunk Costs and Real Options in Antitrust (2005)
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