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Sunk Costs and Real Options in Antitrust

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  • Pindyck, Robert S.

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.

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File URL: http://hdl.handle.net/1721.1/18233
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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 18233.

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Date of creation: 29 Jul 2005
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Handle: RePEc:mit:sloanp:18233

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: 617-253-2659
Web page: http://mitsloan.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

Related research

Keywords: Sunk costs; real options; investment decisions; antitrust; entry barriers; market power; mergers;

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References

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  1. Robert S. Pindyck, 1991. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  2. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Preston R. Fee & Hugo M. Mialon & Michael A. Williams, 2004. "What Is a Barrier to Entry?," American Economic Review, American Economic Association, vol. 94(2), pages 461-465, May.
  4. Pindyck Robert S., 2007. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-25, September.
  5. Rchard Schmalensee, 2004. "Sunk Costs and Antitrust Barriers to Entry," American Economic Review, American Economic Association, vol. 94(2), pages 471-475, May.
  6. Robert S. Pindyck, 1993. "Investments of Uncertain Cost," NBER Working Papers 4175, National Bureau of Economic Research, Inc.
  7. Pindyck, Robert S., 2005. "Pricing Capital under Mandatory Unbundling and Facilities Sharing," Working paper 337, Regulation2point0.
  8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  9. Hausman, Jerry & Myers, Stewart, 2002. "Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk," Journal of Regulatory Economics, Springer, vol. 22(3), pages 287-310, November.
  10. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  11. Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 479-508, August.
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Cited by:
  1. Dennis W. Carlton, 2005. "Barriers To Entry," NBER Working Papers 11645, National Bureau of Economic Research, Inc.
  2. Xiao, Mo & Orazem, Peter F., 2011. "Does the fourth entrant make any difference?: Entry and competition in the early U.S. broadband market," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 547-561, September.
  3. Paul A.Grout & Anna Zalewska, 2006. "Profitability Measures and Competition Law," The Centre for Market and Public Organisation 06/144, Department of Economics, University of Bristol, UK.
  4. Robert S. Pindyck, 2009. "Sunk Costs and Risk-Based Barriers to Entry," NBER Working Papers 14755, National Bureau of Economic Research, Inc.
  5. Dennis W. Carlton & Randal C. Picker, 2007. "Antitrust and Regulation," NBER Working Papers 12902, National Bureau of Economic Research, Inc.
    • Dennis W. Carlton & Randal C. Picker, 2013. "Antitrust and Regulation," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned? National Bureau of Economic Research, Inc.

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