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Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms

Russell Pittman

No 200903, EAG Discussions Papers from Department of Justice, Antitrust Division

Abstract: Economists sometimes decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong – first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs – i.e., a rising shadow price on some constrained input – i.e., in general, acost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with capital intensity.

Keywords: market power; price; mark-up; marginal cost; variable cost (search for similar items in EconPapers)
JEL-codes: B21 D24 D43 K21 L11 L40 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2009-07
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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