TY  - JOUR
AU  - Hall,Robert E.
TI  - The Inefficiency of Marginal-Cost Pricing and The Apparent Rigidity of Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1347
PY  - 1984
Y2  - May 1984
UR  - http://www.nber.org/papers/w1347
L1  - http://www.nber.org/papers/w1347.pdf
N1  - Author contact info:
Robert E. Hall
Hoover Institution
Stanford University
Stanford, CA  94305-6010
Tel: 650/723-2215
E-Mail: rehall@gmail.com
AB  - Under conditions of natural monopoly, private contracts or government regulation may attempt to avoid inefficiency by setting up a pricing formula. Once the capital stock is chosen,the right price to charge the buyer is marginal cost. But the point of this paper is that marginal-cost pricing provides the wrong incentives for the choice of the capital stock by the seller. If the seller can achieve a high price by deliberately under-investing and driving up marginal cost, there will be asystematic tendency toward too small a capital stock. One type of contract or regulatory policy that avoids this problem charges marginal cost to each buyer, but provides a revenue to the seller that is equal to long-run unit cost, not short-run marginal cost. Such a contract or policy will make the price, in the sense of the revenue of the seller per unit of output, appear to be unresponsive to market conditions.
ER  -