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A Markup Interpretation of Optimal Rules for Irreversible Investment / Avinash Dixit, Robert S. Pindyck, Sigbjorn Sodal.
- Format:
- Book
- Author/Creator:
- Dixit, Avinash.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w5971.
- NBER working paper series no. w5971
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1997.
- Summary:
- We re-examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.
- Notes:
- Print version record
- March 1997.
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