Sunk Costs and Real Options in Antitrust
Name
4545-05.pdf
Size
304.51 KB
Format
Adobe PDF
Checksum (MD5)
8e0e339bed2fdcabeef4a60eed4c3ccf
Author(s)
Pindyck, Robert S.
Date Issued
July 29, 2005
Series/Report no.
MIT Sloan School of Management Working Paper
4545-05
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.
Subjects
Sunk costs
real options
investment decisions
antitrust
entry barriers
market power
mergers
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