Sunk Investments Lead to Unpredictable Prices
George J. Mailath, Andrew Postlewaite, Larry Samuelson
American Economic Review · 2004 · Volume 94 · Issue 4
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.
Keywords
Consumer Economics: Theory, Firm Behavior: Theory, Market Structure and Pricing: Perfect Competition, Incomplete Markets, Production, Pricing, and Market Structure, Size Distribution of Firms
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