Under Uncertainty, Corporate Entry And Exit

Firm's entry and exit is an important subject in the field of industrial organization. The aim of this paper is to research firm's entry and exit under uncertainty (the price of product is stochastic in the future), how does the current price affect firm's behavior. The research of traditional theory on this subject still focuses on the comparing of Marshallian long run average cost and short run variable cost with price, and net present value analysis. Those analyses are static under certainty, which are not accord with the reality.Finn's entry and exit (investment and disinvestment) decisions are regarded as the option exercising in this paper. The option value is thought as a part of investment cost. This method emphasize uncertainty during the course of investment relative to the traditional method, so the price that triggers entry (or exit) is higher (or lower) than that of standard Marshallian theory. A mathematic model will be used to explain those gaps between trigger prices. The gaps are attributed to the existence of sunk cost, transaction cost, human capital and incomplete information that induce firm's hysteresis. Later the gap will be found to be significant even with small sunk cost. One could think about firm's entry and exit in a industry with a more practical perspective than Marshallian theory, then one could discuss some issues of industrial organization such as the relationship between profit and market power, and Contestable Market Theory.