@techreport{NBERw5971,
title = "A Markup Interpretation of Optimal Rules for Irreversible Investment",
author = "Avinash Dixit and Robert S. Pindyck and Sigbjorn Sodal",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "5971",
year = "1997",
month = "March",
doi = {10.3386/w5971},
URL = "http://www.nber.org/papers/w5971",
abstract = {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.},
}