Working Paper: NBER ID: w11430
Authors: 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.
Keywords: No keywords provided
JEL Codes: L40; L10; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sunk costs (G31) | barriers to entry (D43) |
| barriers to entry (D43) | market competition (L13) |
| sunk costs (G31) | market power (L11) |
| sunk costs (G31) | predatory pricing (L11) |
| sunk costs (G31) | price distortion (D49) |
| market volatility (G17) | sunk costs (G31) |
| opportunity cost (D61) | sunk costs (G31) |