Re: [OPE] marginal costs

From: Anders Ekeland <>
Date: Mon Dec 08 2008 - 14:26:13 EST

I have argued several times over that last 2-3
years that this is a complete myth, due to
increasing returns to scale, which is the
dominant scale form under capitalism, it is the
type of production function a profit maximizer
would like to have - and consequently in the real
world often achieves - since there is almost always some fixed costs.

I think you will find this point in: Helpman,
Elhannan and Krugman Paul R. (1993), ”Market
Structure and Foreign Trade”, MIT Press. Where
the recent Swedish Bank Memorial Prize Winners
wrote: “The easiest form of scale economies to
give a real world justification is increasing returns to scale”. (p. 32)

I wrote a paper to the 2006 AHE conference
related to this: "The text-book myth of the
monopoly case" arguing that monopoly (large
market shares) gives lower prices and higher
volume - just the opposite of the
"Wonderland-result" of ordinary text-books, i.e.
high price low volume i. As soon as you see
competition as a dynamic phenomenon this follows directly.

Se also Baumol: "The free-market innovation
machine" (2002) for the same point, the
oligopolistic competition is the most welfare
enhancing market form, But all market forms are
transient, there are periods with many firms -
competition leading to fewer firms when there is
less radical technological change - and the
"incumbents" being challenged by new technologies
(main-frame monopoly by mini-computers, minis by
PC's etc. etc. - the Herfindahl index changes over time!)

Most text-books, f.ex Stiglitz&Walsh are schizo
both preaching the dogma and having a series of
concrete examples that increasing returns are
important, leads to better price performance etc.


At 18:38 08.12.2008, you wrote:

>Below you can find a citation which claims that
>this is not the case in capitalist markets, and
>I agree:<?xml:namespace prefix = o ns =
>"urn:schemas-microsoft-com:office:office" />
> From the view point of the ‘perfect’
> competition fallacy, competition would be
> ‘perfect’ only if the entrepreneur were to
> expand the manufacture of each pattern up to
> the point in which the increment cost of
> production equals the marginal price that would
> be obtained on the market. Only then should he
> embark upon the production of a second pattern.
> […] In reality entrepreneur find it moore
> profitable to stop producing a certain pattern
> before this point is reached and embarks upon
> the production of a second, a third, and many
> other patterns. He acts in this way because he
> wants to maximize his profits. (pp. 15)
> “Monopoly Prices”, The Quarterly Journal of
> Austrian Economics, vol. 1, nÂș 2, 1998.
>But on the literature? You can find in every
>mainstream Microeconomics book just the opposite statement.
>I argue in my dissertation that this
>equalization is desirable, but only possible in a Market Socialism.
>A. Agafonow
>De: Paul Cockshott <>
>Para: Outline on Political Economy mailing list <>
>Enviado: lunes, 8 de diciembre, 2008 17:10:23
>Asunto: [OPE] marginal costs
>I seem to recall that a couple of years back
>there was discussion here refuting the following neo-classical position:
>"A competitive firm equates its marginal cost to
>the market price of its product. The equality of
>marginal cost and price is a fundamental
>efficiency condition for the allocation of
>resources. When the condition holds, the
>purchasers of the product equate their marginal
>rates of substitution to the corresponding
>marginal rates of transformation. By contrast,
>under monopoly or oligopoly, the allocation of
>output will be inefficient because price will exceed marginal cost."
>Can anyone remember it more precisely?
>ope mailing list
>ope mailing list

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Received on Mon Dec 8 14:28:08 2008

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