Advanced Search
MyIDEAS: Login

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

Contents:

Author Info

  • Michael Olive

    ()
    (Department of Economics, Macquarie University)

Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.econ.mq.edu.au/research/2002/8-2002Olive.PDF
    File Function: First Version, 2002
    Download Restriction: no

    Bibliographic Info

    Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0208.

    as in new window
    Length: 25 pages.
    Date of creation: Sep 2002
    Date of revision:
    Handle: RePEc:mac:wpaper:0208

    Contact details of provider:
    Postal: Sydney NSW 2109
    Web page: http://www.econ.mq.edu.au/
    More information through EDIRC

    Related research

    Keywords: marginal cost; average variable cost; manufacturing; supply relation;

    Find related papers by JEL classification:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:mac:wpaper:0208. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helen Boneham).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.