Sunk Costs and Real Options in Antitrust

Robert Pindyck

No 11430, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D43 L10 L40 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-bec and nep-com
Note: IO
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Citations: View citations in EconPapers (10)

Published as Collins, W. D. (ed.) Issues in Competition Law and Policy. ABA Press, 2008.

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