Sunk Costs and Real Options in Antitrust

31 Pages Posted: 7 Jul 2005  

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: June 2005

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.

Suggested Citation

Pindyck, Robert S., Sunk Costs and Real Options in Antitrust (June 2005). NBER Working Paper No. w11430. Available at SSRN: https://ssrn.com/abstract=752008

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