Marginal-Cost Price-Output Control: A Critical History and Restatement of the Theory

Marginal-Cost Price-Output Control: A Critical History and Restatement of the Theory

Marginal-Cost Price-Output Control: A Critical History and Restatement of the Theory

Marginal-Cost Price-Output Control: A Critical History and Restatement of the Theory

Excerpt

The subject of this book is the theory that price and/or output is ideal when price equals marginal cost. We call our restatement of this idea the theory of marginal cost price-output control. By earlier writers it has usually been called the theory of marginal-cost pricing or, less often, the theory of incremental-cost pricing. Both of these names are misleading because the function of the theory is to guide the control of output .

In its earliest (1936) form the new theory was stated as a theory of output control, namely, as the theory that output should be increased or decreased until price equals marginal cost, and it has since been periodically restated in this form. Many writers, however, have ignored this version of the theory and claimed merely that price should equal marginal cost, without explaining whether this result should be achieved by means of price or output control. No one has ever explained when it is better to control directly price rather than output or, vice versa. This is one of the contributions of this study, but we shall not further anticipate it here. What we wish to stress now is that there are two separate methods of achieving an ideal output: marginal-cost price control and marginal-cost output control. The term marginal-cost pricing has sometimes been used to mean one, sometimes the other, and sometimes both. Those who use it rarely explain which of these three meanings they have in mind. In our re- statement of the theory of marginal-cost pricing, we have tried to make clear that it includes both price and output control. We have restated it as the theory that either price or output should be directly controlled so as to make price equal marginal cost, and we have ex plained when it is best to control price and when it is best to control output directly . . .

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