Sunk Costs and Real Options in Antitrust
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 uncert...
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| Format: | Working Paper |
| Language: | en_US |
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2005
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| Online Access: | http://hdl.handle.net/1721.1/18233 |
| _version_ | 1826202619630059520 |
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| author | Pindyck, Robert S. |
| author_facet | Pindyck, Robert S. |
| author_sort | Pindyck, Robert S. |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T12:11:26Z |
| format | Working Paper |
| id | mit-1721.1/18233 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T12:11:26Z |
| publishDate | 2005 |
| record_format | dspace |
| spelling | mit-1721.1/182332019-04-10T21:48:50Z Sunk Costs and Real Options in Antitrust Pindyck, Robert S. Sunk costs real options investment decisions antitrust entry barriers market power mergers 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. 2005-07-29T16:59:35Z 2005-07-29T16:59:35Z 2005-07-29T16:59:35Z Working Paper http://hdl.handle.net/1721.1/18233 en_US MIT Sloan School of Management Working Paper 4545-05 311822 bytes application/pdf application/pdf |
| spellingShingle | Sunk costs real options investment decisions antitrust entry barriers market power mergers Pindyck, Robert S. Sunk Costs and Real Options in Antitrust |
| title | Sunk Costs and Real Options in Antitrust |
| title_full | Sunk Costs and Real Options in Antitrust |
| title_fullStr | Sunk Costs and Real Options in Antitrust |
| title_full_unstemmed | Sunk Costs and Real Options in Antitrust |
| title_short | Sunk Costs and Real Options in Antitrust |
| title_sort | sunk costs and real options in antitrust |
| topic | Sunk costs real options investment decisions antitrust entry barriers market power mergers |
| url | http://hdl.handle.net/1721.1/18233 |
| work_keys_str_mv | AT pindyckroberts sunkcostsandrealoptionsinantitrust |