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Sunk Costs and Real Options in Antitrust

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  • Robert S. Pindyck

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11430.

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Date of creation: Jun 2005
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Publication status: published as Collins, W. D. (ed.) Issues in Competition Law and Policy. ABA Press, 2008.
Handle: RePEc:nbr:nberwo:11430

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  1. Schmalensee, Richard, 2004. "Sunk Costs and Antitrust Barriers to Entry," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4457-04, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. repec:reg:wpaper:337 is not listed on IDEAS
  3. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  4. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 969-85, December.
  5. Robert S. Pindyck, 1992. "Investments of Uncertain Cost," NBER Working Papers 4175, National Bureau of Economic Research, Inc.
  6. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
  7. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  8. Pindyck Robert S., 2007. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," Review of Network Economics, De Gruyter, De Gruyter, vol. 6(3), pages 1-25, September.
  9. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 707-27, November.
  10. repec:reg:rpubli:337 is not listed on IDEAS
  11. Hausman, Jerry & Myers, Stewart, 2002. "Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk," Journal of Regulatory Economics, Springer, Springer, vol. 22(3), pages 287-310, November.
  12. 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, MIT Press, vol. 103(3), pages 479-508, August.
  13. Preston R. Fee & Hugo M. Mialon & Michael A. Williams, 2004. "What Is a Barrier to Entry?," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 461-465, May.
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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. Paul A.Grout & Anna Zalewska, 2006. "Profitability Measures and Competition Law," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 06/144, Department of Economics, University of Bristol, UK.
  3. Dennis W. Carlton & Randal C. Picker, 2013. "Antitrust and Regulation," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 25-61 National Bureau of Economic Research, Inc.
  4. Xiao, Mo & Orazem, Peter, 2010. "Does the Fourth Entrant Make Any Difference? Entry and Competition in the Early U.S. Broadband Market," Staff General Research Papers 32147, Iowa State University, Department of Economics.
  5. Robert S. Pindyck, 2009. "Sunk Costs and Risk-Based Barriers to Entry," NBER Working Papers 14755, National Bureau of Economic Research, Inc.

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