Sunk Costs and Real Options in Antitrust

Robert S. Pindyck
2005 Social Science Research Network  
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
more » ... 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. JEL Classification Numbers: L40; L10, D43
doi:10.2139/ssrn.742505 fatcat:4pn4mry64reipjqhhq53fbttda