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  3. American Economic Review
  4. September 2004
  5. Sunk Investments Lead to Unpredictable Prices

Sunk Investments Lead to Unpredictable Prices

  • George J. Mailath
  • Andrew Postlewaite
  • Larry Samuelson
American Economic Review
vol. 94, no. 4, September 2004
(pp. 896-918)
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Abstract

We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.

Citation

Mailath, George, J., Andrew Postlewaite, and Larry Samuelson. 2004. "Sunk Investments Lead to Unpredictable Prices." American Economic Review, 94 (4): 896-918. DOI: 10.1257/0002828042002660

JEL Classification

  • D11 Consumer Economics: Theory
  • D21 Firm Behavior: Theory
  • D41 Market Structure and Pricing: Perfect Competition
  • D52 Incomplete Markets
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms