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Economies of scale and self-financing rules with non-competitive factor markets

  • Small, Kenneth A.

When a firm or public authority prices output at marginal cost, its profits are related to the degree of local economies of scale in its cost function. As is well known, this result extends to the case where some congestion-prone inputs are supplied by users. I show that contrary to common belief, the result holds even when scale economies are affected by a rising factor supply curve. In that case, constant returns to scale in production produces diseconomies of scale in the cost function, making marginal-cost pricing profitable. Examples are provided for a monopsonist both with and without price discrimination. In the latter case, second-best pricing is also considered: profits then are not governed in the usual way either by returns to scale in production or by scale economies in the cost function, but some useful bounds are provided.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 74 (1999)
Issue (Month): 3 (December)
Pages: 431-450

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Handle: RePEc:eee:pubeco:v:74:y:1999:i:3:p:431-450
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Newbery, David M, 1990. "Pricing and Congestion: Economic Principles Relevant to Pricing Roads," Oxford Review of Economic Policy, Oxford University Press, vol. 6(2), pages 22-38, Summer.
  2. Arnott, Richard, 1979. "Optimal city size in a spatial economy," Journal of Urban Economics, Elsevier, vol. 6(1), pages 65-89, January.
  3. Keeler, Theodore E & Small, Kenneth A, 1977. "Optimal Peak-Load Pricing, Investment, and Service Levels on Urban Expressways," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 1-25, February.
  4. Kanemoto, Yoshitsugu, 1977. "Cost-benefit analysis and the second best land use for transportation," Journal of Urban Economics, Elsevier, vol. 4(4), pages 483-503, October.
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  7. De Vany, Arthur & Saving, Thomas R, 1980. "Competition and Highway Pricing for Stochastic Traffic," The Journal of Business, University of Chicago Press, vol. 53(1), pages 45-60, January.
  8. Richard Arnott & James G. MacKinnon, 1976. "Market and Shadow Land Rents with Congestion," Working Papers 250, Queen's University, Department of Economics.
  9. Berglas, Eitan & Pines, David, 1981. "Clubs, local public goods and transportation models : A synthesis," Journal of Public Economics, Elsevier, vol. 15(2), pages 141-162, April.
  10. Richard Arnott & Marvin Kraus, 1995. "Self-Financing of Congestible Facilities in a Growing Economy," Boston College Working Papers in Economics 304., Boston College Department of Economics.
  11. Kraus, Marvin, 1981. "Scale economies analysis for urban highway networks," Journal of Urban Economics, Elsevier, vol. 9(1), pages 1-22, January.
  12. Oakland, William H., 1972. "Congestion, public goods and welfare," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 339-357, November.
  13. William Vickrey, 1965. "Pricing as a Tool in Coordination of Local Transportation," NBER Chapters, in: Transportation Economics, pages 275-296 National Bureau of Economic Research, Inc.
  14. Berglas, Eitan, 1976. "On the Theory of Clubs," American Economic Review, American Economic Association, vol. 66(2), pages 116-21, May.
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