Is Average Variable Cost a Good Proxy for Short-Run Marginal Cost and Why is it Important?

Michael Olive

No 208, Research Papers from Macquarie University, Department of Economics

Abstract: Average variable cost is often used as a proxy for short-run marginal cost in empirical studies of manufacturing firm behaviour. Assuming that average variable cost is equal to marginal cost, Cowling and Waterson (1976) derive a model that links industry structure to the industry price-cost margin and Areeda-Turner (1975) provide a test of predatory pricing. However, the research on the relationship between average variable cost and short-run marginal cost mainly comes from survey studies. This paper employs a supply relation similar to Bresnahan's (1982) in order to estimate industry marginal cost divided by industry average variable cost (MC/AVC) for 89 four-digit Australian manufacturing industries during 1971 to 1984. The 3SLS results indicate that MC/AVC is not significantly different from one in 40 percent of industries, but is cyclical in only 30 percent of industries. This suggests that industry average variable cost multiplied by a constant can be used as a proxy for industry marginal cost for a large number of industries over a short period.

Keywords: marginal cost; average variable cost; manufacturing; supply relation (search for similar items in EconPapers)
JEL-codes: D2 L1 L6 (search for similar items in EconPapers)
Pages: 25 pages.
Date: 2002-09
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.econ.mq.edu.au/research/2002/8-2002Olive.PDF First Version, 2002 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.econ.mq.edu.au:80 (No such host is known. )

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mac:wpaper:0208

Access Statistics for this paper

More papers in Research Papers from Macquarie University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Helen Boneham ( this e-mail address is bad, please contact ).