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Economies of Scale and Self-Financing Rules with Noncompetitive Factor Markets

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  • Small, Kenneth A.

Abstract

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.

Suggested Citation

  • Small, Kenneth A., 1996. "Economies of Scale and Self-Financing Rules with Noncompetitive Factor Markets," University of California Transportation Center, Working Papers qt70m3c7hh, University of California Transportation Center.
  • Handle: RePEc:cdl:uctcwp:qt70m3c7hh
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    Cited by:

    1. Ubbels, Barry & Verhoef, Erik T., 2008. "Auctioning concessions for private roads," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(1), pages 155-172, January.
    2. Verhoef, Erik T., 2007. "Second-best road pricing through highway franchising," Journal of Urban Economics, Elsevier, vol. 62(2), pages 337-361, September.
    3. Tan, Zhijia, 2012. "Capacity and toll choice of an add-on toll road under various ownership regimes," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(6), pages 1080-1092.
    4. Feng, Guohua & Serletis, Apostolos, 2010. "A primal Divisia technical change index based on the output distance function," Journal of Econometrics, Elsevier, vol. 159(2), pages 320-330, December.
    5. Lu, Zhaoyang & Meng, Qiang, 2017. "Analysis of optimal BOT highway capacity and economic toll adjustment provisions under traffic demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 100(C), pages 17-37.
    6. Erik T. Verhoef & Jan Rouwendal, 2004. "Pricing, Capacity Choice, and Financing in Transportation Networks," Journal of Regional Science, Wiley Blackwell, vol. 44(3), pages 405-435.
    7. Sandler, Todd, 2001. "On financing global and international public goods," Policy Research Working Paper Series 2638, The World Bank.
    8. Kraus, Marvin, 2008. "Economies of scale in networks," Journal of Urban Economics, Elsevier, vol. 64(1), pages 171-177, July.
    9. Richard J. Arnott, 2005. "City Tolls – One Element of an Effective Policy Cocktail," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(3), pages 5-11, November.
    10. Yang, Hai & Meng, Qiang, 2002. "A note on "highway pricing and capacity choice in a road network under a build-operate-transfer scheme"," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(7), pages 659-663, August.
    11. repec:eee:transb:v:102:y:2017:i:c:p:105-123 is not listed on IDEAS
    12. Erik T. Verhoef, 2012. "Cost Recovery of Congested Infrastructure under Market Power," Tinbergen Institute Discussion Papers 12-064/3, Tinbergen Institute.
    13. Erik T. Verhoef & Herbert Mohring, 2007. "Self-Financing Roads," Tinbergen Institute Discussion Papers 07-068/3, Tinbergen Institute.
    14. repec:eee:juecon:v:101:y:2017:i:c:p:45-56 is not listed on IDEAS
    15. repec:ces:ifodic:v:3:y:2005:i:3:p:14567606 is not listed on IDEAS
    16. Marvin Kraus, 2006. "Returns to Scale in Networks," Boston College Working Papers in Economics 644, Boston College Department of Economics.

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