Entry And Exit Decisions Under Uncertainty
AbstractA firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs. Copyright 1989 by University of Chicago Press.
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Bibliographic InfoPaper provided by Princeton, Department of Economics - Financial Research Center in its series Papers with number 91.
Length: 31 pages
Date of creation: 1988
Date of revision:
prices ; costs ; uncertainty;
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