The previous section sought to advance an introduction to the long run in Marshallian theory, shaped by differential investment and integration of factors of production that might otherwise be considered fixed in the short run. The question of differential variability of production factors ultimately defines temporal periods for Marshallian theory where, as we have argued, such difference in variability do not exist at all for Walrasian/Paretian firms. This section will take the previous one as its point of departure in arguing that differences in the variability of production factors will generate differences in production costs for individual firms that, in turn, impact market pricing to some degree. As such, our analysis in this section will focus overwhelmingly on long run transformations of average and marginal cost schedules for individual firms. Conversely, I have labeled this section "An Initial Appraisal" because I mean to differentiate its material from our subsequent elaboration of a rationalistic formal theory of long run profit maximization/cost minimization indebted to the work of American Paretian/Marshallian economist Jacob Viner that remains the standard theory of long run profit maximization and competitive market pricing in mainstream Neoclassical economics. To the contrary, this section will seek to remain on a more sensitively empirical level.
Marshall's own consideration of the theoretic long run in price determination remains under the heading of the normal price, and this concept reflects the particular natures of industries that are alternately shaped by rapid and regular short run fluctuations in supply and demand or by extended periods of stability in market pricing and quantities supplied and demanded. In the end, the normal price, for Marshall, is the price that obtains when a certain set of short run market fluctuations have fully worked out their effects on a particular market. Hence, certain markets or industries experience relatively fluid normal prices while others experience relatively static normal prices over extended periods of time. In these terms, it would be incorrect to axiomatically link Marshall's concept of the normal price to long run pricing. On the other hand, to the extent that the normal price tends to express some kind of an ideal state, at which divergent pressures to increase or decrease market prices and quantities supplied or demanded cease to operate, we might at least provisionally hold to a concept of the normal price, abstracting from short run market forces, that will obtain, on average, in the long run.
If Marshall's normal price represents a potential starting point for our initial examination of long run pricing, then, emerging from the last section, the theme of scale adjustments from diverse capital investments remains similarly important. To reiterate the insights of the previous section, if firms lack the ability to make instantaneous and continuous adjustments to certain production factors in the short run, then their ability to both replace/substitute relatively inefficient factors and to increase quantities of all (or all producible) factors, including ones that may take longer periods to fully integrate into production, may enable them to fully realize profit maximization/cost minimization conditions over extended periods. Again, the realization of such conditions demands that market conditions do not change in any extreme manner over an extended period. There can be no drastic innovations in technology, no extreme variations in consumer demand, and no severe changes in competition between firms. If all of these conditions obtain, then firms will have the time to regulate their production processes to realize objective profit maxima/cost minima by adjusting their mix of production factors and by adjusting their output scales in order to conform to their objective financial constraints (i.e. assuming a single lowest cost technology, they would be operating as Walrasian/Paretian firms in a general equilibrium system). Thus, if the long run was to operate as an unimpeded progression of a given set of market and technological conditions and if information transmissions between competing firms within a given market were sufficient to permit virtually perfect information, then we would find ourselves, at least with respect to one distinct market, in perfect competition.
The previous two paragraphs effectively lay the conditions under which we will examine long run pricing for individual firms in relation to competitive markets. Specifically:
1. Relative stability in exogenous conditions affecting quantities supplied across individual short run periods. That is to say, proceeding from one of Marshall's favorite examples of a market affected by day-to-day conditions, daily markets for fishery products, exogenous forces (i.e. naturally occurring but otherwise unpredictable patterns in the maritime distribution of sea bass, yellow-fin tuna, or other marketable species) cannot impact the short run productivity of firms in the market. The range of exogenous conditions represented here is extremely wide, including broad supply chain constraints (natural/ecological or industrial) and legal/statutory or regulatory constraints on the productivity of individual firms or entire industries comprising multiple regionally focused markets.
2. Relative stability in quantities demanded by consumers over successive short run periods, or relatively predictable patterns of transformation in consumer demand over time. Critically, firms have to face a relatively predictable schedule of reservation prices across the full spectrum of consumers in individual markets or across multiple regionally defined or otherwise linked markets in order to determine how consumers are likely to respond to particular capital investments that will impact quantities supplied. In the most general sense, tastes have to be constant. More emphatically, the goods and/or services exchanged must occupy a distinct market niche for which the demand is relatively constant in relation to the precise needs of consumers. If demand patterns are not absolutely constant over particular short term periods, then there should be some predictable pattern of demand that firms can readily analyze to determine adequate production quantities. Seasonal changes in macroeconomic consumption patterns or in demand for certain products, for example, can generate the sort of diagnosable/regularized transformations of demand. Retail demand for meats that can be readily grilled outdoors, thus, tends to increase in warmer seasons of the year relative to other meat products that are better for slow braising indoors. The ability of firms to diagnose such patterns in advance of consumers is key to both maintaining adequate quantities supplied and to managing output prices in relation to the expected range of reservation prices of consumers.
3. Relative stability of production technologies, or relatively predictable patterns of transformation in production technologies and induced demand for factors of production. It is reasonable to expect that in most production processes, technologies will change over prolonged periods to incorporate new combinations of production factors that can generate larger quantities of outputs at lower per unit costs. There may or may not be an innate drive for firms to innovate, but, at least initially, firms tend to enjoy tangible benefits from innovations that lower overall factor utilization per unit of output. With this in mind, some production processes are apt to experience rapid transformations in production technologies, resulting in fairly regular fluctuations in patterns of factor demand by individual firms and in rapid changes to per unit average costs of output. In other cases, production technologies remain reasonably constant for decades, with overall average cost structures only changing with changes to exogenous market conditions (e.g. increases in demand for certain production factors in other industries). To the extent that we are able to diagnose patterns of transformation in industries where there is rapid technological change, however, such changes are not terribly problematic. If changes become rapid and unpredictable, however, individual firms may not be capable of readily maximizing profits/minimizing costs subject to wholly fluid objective constraints. Managing capital investments would become a crap shoot, with entrepreneurs making guesses on particular, costly equipment, infrastructure, and human resource training initiatives in order to stay ahead of competitors without actually being able to sensibly analyze ex ante the impact of such investments on per unit cost structures.
4. Relative stability of competitive structures in relevant markets or relatively predictable patterns in the transformation of market competition over time. On a purely theoretic level, competition should both rigorously enforce a single price among firms offering relatively homogeneous outputs in regionally defined market contexts and should drive technological innovation, as individual firms seek to obtain average cost advantages over competitors. If, in these terms, the distribution of information on production technologies and consumer preferences is relatively even among all competitors, we should derive, in the long run, competitive structures that approach perfect competition. On the other hand, we do not necessarily need perfect competition in relevant markets to arrive in circumstances where firms can successfully maximize profits/minimize costs subject to their objective financial constraints. In every case and at every scale of production, firms are seeking to follow the short run marginal cost pricing rule (i.e. the marginal revenue received from the last unit of output sold must equal the marginal cost to the firm of producing this unit). However, structures of competition are relevant in determining what this rule implies with respect to average costs, integration of new production technologies, management of production scales, and engagement/penetration of individual markets. The more competitive the market, the more likely individual firms will be compelled to invest in and integrate capital that can reduce average costs per unit of output in order to maintain, minimally, their existing market shares. The less competitive the market, the more likely firms can overlook inefficiencies in factor utilization that raise average costs. Likewise, expectations that an individual market is apt to experience a growth or decline in competitiveness can shape the willingness of firms to undertake capital investments to reduce average costs.
5. Well defined or otherwise diagnosable, but exhaustible, internal and/or external scale economies. This condition requires some deeper examination, especially in relation to the previous condition on the state of market competition. To differentiate, internal scale economies arise within the production processes undertaken by the firm as it increases the scale of output. External scale economies arise as production within an entire regionally focused market or an entire industry increases in scale. Both conditions result in a diminution of average costs per unit. Critically, if a firm enjoys the potential for internal scale economies, then it stands to benefit from an increase in its scale of production at least up to the point in which its average total costs are globally minimized at a defined factor combination. In cases where average total costs decrease monotonically with increases in scale, we have the limiting condition of a natural monopoly, where the extreme impediments arising from entry of new firms result in domination of a market by a single entrant. Natural monopolies will not concern us here. For our purposes, internal scale economies are likely to exist but, more importantly, such economies can be exhausted at a certain, generally attainable scale of output, enabling new entrants to easily compete against firms with somewhat longer histories at engagement with particular markets. Conversely, the more varied circumstances generating external scale economies are, in relatively competitive market contexts, less susceptible to manipulation by individual firms. Cost reductions from increases in the scale of up stream suppliers or reductions in transportation or "search" costs from geo-spatial "clustering" of competing firms cannot be instigated by any individual firm. The impacts of external scale economies on competition are, likewise, more open to question then those arising from internal scale economies. Certain sources of external scale economies, particularly those arising from industrial clustering, may be readily enjoyed by new entrants. Others demand prolonged work in networking to establish the sorts of connections that might sustain lower average costs per unit of output. In either case, we have to incorporate an analysis of internal and external scale economies into our larger imagery of individual firms and individual markets in order to fully comprehend how average costs and competitive structures between firms change over sequential short run periods.
If these conditions hold, then firms should realize predictable cycles of short run market pricing, extending into longer run periods as expected market and/or technological developments begin to make their mark on average cost structures. Effectively, sequences in short short run market pricing may not be entirely static but any short run perturbations will work themselves out in a relatively predictable way to constitute a consistent pricing axis, however much this axis demonstrates the effects of external economies or diseconomies of scale (i.e. a downward or upward slope in price-quantity space, respectively). This apparent relative predictability shapes the capacity of individual firms to make decisions regarding capital investments for factors that will not be fully integrated into production for an extended period of time. Critically, no entrepreneurs possess a crystal ball with which to divine the direction of future market conditions and anticipate exogenous events that might adversely impact their ability to maximize returns from an investment. However, we can organize our understanding of how entrepreneurs make investment decisions, with reference to expected future market conditions, through a thorough analysis of contemporaneous average cost structures and market pricing as if such conditions might obtain in the future with some level of confidence.
We can better elaborate this analysis of longer term market pricing and changes in scale, both for individual firms and a larger industry or market, by means of an example. The microbrewed beer industry poses an example close to my heart. In the US, the term microbrewery designates breweries producing less than 15,000 barrels/460,000 gallons per year, although some specialty breweries operating on larger scales continue to be identified as microbreweries. Traditional microbreweries are truly regional operators, offering casks to drinking establishments and, in many cases, bottled or canned products for retail distribution to markets in relatively close proximity (e.g. within a 50 mile radius of the production site), in the U.S., through a three-tier system with legally distinct wholesalers and retailers. The lagers, ales, stouts, and porters they sell do not strictly compete with mass market offerings. They compete, to some extent, with other microbreweries within their range of operations and, to some extent, with imported specialty beer producers. However, even in the former regard, the density of microbreweries within a given area is, to a great degree, a marker of the strength of demand for unique, fresh, locally produced beers in general, a demand that will both sustain multiple microbreweries and induce new breweries to enter the market. In this sense, the microbrewed beer industry transcends the image of homogeneous production rooted in the theoretic vision of perfect competition. Nonetheless, we can still develop, within the contours of qualitative variation, some imagery of entrepreneurial firms investing capital to adjust their production scales and reduce average cost structures in the microbrewed beer industry.
Let us say that we have a particular microbrewery, operating within a large metropolitan market (over 3.5 million inhabitants) and offering a range of products appealing to diverse subsets of the larger market for craft-brewed beers, both in casks and in glass bottles. Furthermore, the firm operates an on-production-site brew-pub at which patrons can drink draught beer and buy recyclable sixty-four fluid ounce growlers to take home. In this manner, the firm is competing in multiple different subsets of the larger market for craft-brewed beer. For our purposes, we are interested in a single subset - production and retail exchange of India Pale Ale (IPA) in twelve ounce containers (glass or aluminum). Such containers are, further, typically packaged in sets of four or six. Production of this product obviously involves a range of transformative materials (e.g. water, barley, hops, yeast, bottling/packaging material, etc.), diverse labor services, and substantial quantities of capital (e.g. the human capital/know-how of a master brewer, copper brew vats, storage tanks, bottling equipment, etc.). As all of these production factors come together, we derive a broader imagery of the immediately variable factors of production and those factors which demand a longer term investment.
Surveying the market, we have to concede a certain to degree of complexity not otherwise apparent for markets conceived in strict conformity to requirements for perfect distribution of information. Emphatically, the equilibrium price is conceived in axial terms. That is to say, competition need not enforce a singular equilibrium price across all suppliers if we can otherwise identify particular sources of divergence between prices charged by individual suppliers. On the other hand, divergences must be small and explicable in relation to a general price axis, however we define the latter. Thus, as the axial price increases, marginal, higher priced suppliers may become more competitive in relation to lower priced suppliers. As it declines, marginal suppliers may drop out of the market. I will define such an axis in terms of a weighted average of prices charged within the market. Conversely, in conformity with a strict Neoclassical imagery of equilibrium market pricing in relation to the marginal principle, perfect information would uniquely determine a single equilibrium price excluding any variation across suppliers. Markets for other, relatively homogeneous goods we've referenced, like chicken breasts, may follow pricing patterns more in conformity with such a strict marginal pricing principle. In the forthcoming critique of the theory presented here, I will return to this problem of equilibrium pricing in relation to information, but, for now, it will suffice to say that the particular, insoluble heterogeneities involved in the production of India Pale Ale determine the axial nature of market pricing.
Our firm confronts a marketplace in which its year-round, flagship India Pale Ale (a moderately hoppy/bitter product of moderately high alcohol content (5.8 percent by volume)), "competes" (again, I want to stress that the idea of competition may, in some degree, be outweighed by the complementary nature of divergent flavors/variations on a theme among diverse micro-brewers) with five other microbreweries, all producing twelve ounce containers of India Pale Ale for wholesale/retail distribution. If we label our firm microbrewery A, then we will label its "competitors" microbreweries B, C, D, E, and F. By comparison to its competitors, A is at the low end of the mid range within the market with respect to production volume. Microbreweries B and E generate a slightly larger volume. Microbrewery D, the oldest and most well established microbrewery in the market, outproduces all competitors by volume. Microbrewery C is a relatively new entrant, producing slightly lower volumes. Microbrewery F is a committed nanobrewery, producing in very small volumes to a committed, loyal retail clientele - it sells more directly in larger quantity containers. Production methods and technologies vary across of the breweries, ensuring a continuous divergence in production costs, even where output volumes are equal. All breweries follow the marginal cost pricing rule, even as their marginal costs diverge from the axial price. Table 8 follows the monthly prices charged by each brewery (subject to their individual marginal cost pricing calculations), their individual sales volumes, the average/axial price within the market for twelve ounce IPA containers, and the total volume of sales across all producers in the market over one year, where the latter two calculations enable us to postulate an equilibrium price/volume within the market as a whole.
| Firm | P12 Jan Y1 | X12 Jan Y1 | P12 Feb Y1 | X12 Feb Y1 | P12 Mar Y1 | X12 Mar Y1 | P12 Apr Y1 | X12 Apr Y1 |
| A | 2.1 | 2,200 | 2.08 | 2,100 | 2.12 | 2,350 | 2.11 | 2,290 |
| B | 2 | 3,000 | 1.97 | 2,850 | 2.03 | 3,100 | 2 | 3,000 |
| C | 1.9 | 1,800 | 1.88 | 1,600 | 1.91 | 1,900 | 1.9 | 1,750 |
| D | 1.9 | 4,400 | 1.88 | 4,150 | 1.91 | 4,500 | 1.89 | 4,300 |
| E | 2 | 3,000 | 1.98 | 2,900 | 2.01 | 3,050 | 1.98 | 2,900 |
| F | 2.1 | 900 | 2.09 | 870 | 2.14 | 1,060 | 2.12 | 950 |
| Ave.Pr. | 1.98 | 1.96 | 2 | 1.98 | ||||
| Total Vol. | 15,300 | 14,470 | 15,960 | 15,190 | ||||
| Firm | P12 May Y1 | X12 May Y1 | P12 Jun Y1 | X12 Jun Y1 | P12 Jul Y1 | X12 Jul Y1 | P12 Aug Y1 | X12 Aug Y1 |
| A | 2.13 | 2,400 | 2.15 | 2,500 | 2.18 | 2,600 | 2.14 | 2,450 |
| B | 2.03 | 3,100 | 2.08 | 3,250 | 2.02 | 3,050 | 2.02 | 3,050 |
| C | 1.91 | 1,850 | 1.93 | 2,000 | 1.95 | 2,100 | 1.93 | 2,000 |
| D | 1.91 | 4,450 | 1.92 | 4,550 | 1.95 | 4,750 | 1.96 | 4,800 |
| E | 2.02 | 3,100 | 2.05 | 3,200 | 2.09 | 3,300 | 1.98 | 2,900 |
| F | 2.14 | 1,060 | 2.14 | 1,050 | 2.13 | 1,020 | 2.13 | 1,020 |
| Ave. Pr. | 2 | 2.03 | 2.04 | 2.01 | ||||
| Total Vol. | 15,960 | 16,550 | 16,820 | 16,220 | ||||
| Firm | P12 Sep Y1 | X12 Sep Y1 | P12 Oct Y1 | X12 Oct Y1 | P12 Nov Y1 | X12 Nov Y1 | P12 Dec Y1 | X12 Dec Y1 |
| A | 2.12 | 2,350 | 2.13 | 2,420 | 2.15 | 2,500 | 2.17 | 2,580 |
| B | 2.03 | 3,100 | 2.06 | 3,200 | 2.06 | 3,200 | 2.11 | 3,460 |
| C | 1.93 | 2,090 | 1.96 | 2,120 | 1.99 | 2,250 | 2.01 | 2,320 |
| D | 1.95 | 4,750 | 1.96 | 4,800 | 1.98 | 4,920 | 2 | 5,150 |
| E | 2.02 | 3,100 | 2.05 | 3,200 | 2.07 | 3,240 | 2.07 | 3,240 |
| F | 2.13 | 980 | 2.13 | 1,020 | 2.15 | 1,100 | 2.15 | 1,100 |
| Ave. Pr. | 2.01 | 2.03 | 2.05 | 2.07 | ||||
| Total Vol. | 16,370 | 16,760 | 17,210 | 17,850 |
The principal argument that I mean to advance in producing the above table of hypothetical prices and quantities, above all concerning the relationship between total volumes and average prices across the market, concerns the demand driven nature of short run market pricing. Given the methodology followed in outlining average market prices, in relation to the output volumes of individual firms for whom individual volumes and marginal cost pricing reflect, at least, partial independence from the larger market, we still realize a broader positive relationship between total sales volumes and average prices. This suggests that consumer demand for India Pale Ale, in general, drives both total sales volumes and average prices within the market. A possible alternative dynamic in which quantities demanded across the market remained largely static and average prices declined as consumers sought out lower priced suppliers of IPA, might be more indicative of a market for largely homogeneous goods. As such, from the outset, the proprietors of our microbrewery A know that, at least over the course of this short run period, changes in average prices within the market are driven by changes in consumer demand. Looking over a somewhat longer period, we might hypothesize that demand is seasonal in nature, with quantities demanded rising slightly in summer and, again, slightly more over the late fall and winter holiday season. In this manner, we can potentially satisfy at least one condition (#2) among those that interest us regarding the long run: consumer demand may follow a diagnosable seasonal pattern.
Beyond considerations on consumer demand, we may be able to make other relevant reflections concerning our above conditions. Again, if we adhere to the assumption that our firms operate under strict marginal cost pricing, then the particular patterns of individual prices shown above do not indicate anything about a shift in production technologies employed by individual firms (condition #3) or about factor market pricing or other external, exogenous drivers of production costs (condition #1). All of the firms above, including our firm A, appear to demonstrate a fairly stable pattern of marginal cost pricing relative to the level of consumer demand that they encounter. We can, in this respect, issue a concern regarding the direction of causality if, by assumption, each firm makes production and pricing decisions to the exclusion of purchasers, but we would need to proceed to a deeper level of analysis to answer such questions. Moreover, as long as quantities supplied and demanded for IPAs from each individual firm largely equilibrate, it does not really matter whether consumers or firms demonstrated greater flexibility in allowing prices to fluctuate in order to allow the market to clear. I am comfortable placing to onus on individual firms and arguing that the individual prices shown above are products of an effort by firms to deduce the price at which they would be able to liquidate their daily, weekly, and/or monthly inventories to consumers.
Reiterating our reflections so far, the nature of competition (condition #4), in an industry where products are resolutely heterogeneous and niche-oriented, must be distinctly different from industries in which products are rigorously homogeneous. In the case of twelve ounce IPA containers, microbreweries in this market vary significantly in their efforts to engage with the market and their alternative mechanisms for distribution. Microbrewery D produces more IPA in twelve ounce containers than any of its competitors and has been doing so for longer. Its reputation has cemented a strong performance within the market, and it does not need to undertake alternative distribution methods. By contrast, microbrewery F has been in the market for a comparable length of time but maintains a strictly finite clientele by choice. Its marketing of twelve ounce retail glass bottles of IPA is an afterthought to its brew pub and growler sales. Interjecting microbrewery A within this broader marketplace as a newer entrant, it might be evident that a wide range of approaches to the market exist between these two extrema, and that, subject to variations in market engagement, diverse firms enjoy the potential to succeed in developing their own market niches. Likewise, the problem of internal and external scale economies (condition #5) is incompletely diagnosed above, but there is, minimally, a suggestion that microbrewery D produces at levels of average total cost undercutting its competitors by virtue of its utilization of technologies promising lower costs subject to larger scales of output. Definitively, we need more information, or, rather, our microbrewery's proprietors need more information regarding production costs, technologies, consumer demand, and thresholds in cost reduction from scalar expansions in order to continue its engagement with the market.
Table 9, therefore, extends our problem, incorporating pricing and sales volume statistics from three months (January, May, and September) for four additional years, in the interest of tracking market engagement across the six microbreweries for a longer run period.
| Firm | P12 Jan Y2 | X12 Jan Y2 | P12 May Y2 | X12 May Y2 | P12 Sep Y2 | X12 Sep Y2 | P12 Jan Y3 | X12 Jan Y3 |
| A | 2.11 | 2,300 | 2.14 | 2,450 | 2.12 | 2,350 | 2.11 | 2,250 |
| B | 2.1 | 3,000 | 2.08 | 3,250 | 2.06 | 3,200 | 2.03 | 3,100 |
| C | 1.93 | 2,000 | 1.93 | 2,000 | 2 | 2,280 | 1.96 | 2,120 |
| D | 1.95 | 4,770 | 1.93 | 4,600 | 1.95 | 4,750 | 1.96 | 4,800 |
| E | 2.02 | 3,100 | 2.02 | 3,100 | 2.05 | 3,200 | 2 | 3,000 |
| F | 2.12 | 940 | 2.14 | 1,050 | 2.13 | 980 | 2.12 | 940 |
| Ave.Pr. | 2.02 | 2.02 | 2.03 | 2.01 | ||||
| Total Vol. | 16,110 | 16,450 | 16,760 | 16,210 | ||||
| Firm | P12 May Y3 | X12 May Y3 | P12 Sep Y3 | X12 Sep Y3 | P12 Jan Y4 | X12 Jan Y4 | P12 May Y4 | X12 May Y4 |
| A | 2.11 | 2,300 | 2.08 | 2,100 | 2.08 | 2,100 | 2.06 | 2,000 |
| B | 2.06 | 3,200 | 2.02 | 3,050 | 2.04 | 3,680 | 2.06 | 3,760 |
| C | 1.99 | 2,250 | 2.04 | 2,450 | 1.93 | 2,000 | 2 | 2,280 |
| D | 1.98 | 4,900 | 2.01 | 5,250 | 1.96 | 4,800 | 1.98 | 4,900 |
| E | 2.02 | 3,100 | 2.05 | 3,200 | 1.98 | 2,900 | 2.02 | 3,100 |
| F | 2.15 | 1,100 | 2.09 | 870 | 2.12 | 940 | 2.14 | 1,050 |
| Ave. P. | 2.03 | 2.04 | 2 | 2.03 | ||||
| Total Vol. | 16,850 | 16,920 | 16,420 | 17,090 | ||||
| Firm | P12 Sep Y4 | X12 Sep Y4 | P12 Jan Y5 | X12 Jan Y5 | P12 May Y5 | X12 May Y5 | P12 Sep Y5 | X12 Sep Y5 |
| A | 2.08 | 2,100 | 2.06 | 2,000 | 2.08 | 2,100 | 2.08 | 2,100 |
| B | 2.07 | 3,880 | 2.02 | 3,600 | 2.07 | 3,820 | 2.06 | 3,780 |
| C | 1.99 | 2,250 | 1.99 | 2,250 | 1.99 | 2,200 | 2.01 | 2,340 |
| D | 2 | 5,140 | 1.96 | 4,800 | 2 | 5,120 | 2.01 | 5,270 |
| E | 2.05 | 3,200 | 2.01 | 3,050 | 2 | 3,000 | 2 | 3,000 |
| F | 2.12 | 940 | 2.2 | 940 | 2.11 | 920 | 2.1 | 900 |
| Ave. Pr. | 2.04 | 2.01 | 2.03 | 2.03 | ||||
| Total Vol. | 17,510 | 16,640 | 17,160 | 17,390 |
Unpacking the story told by the numbers above, there appears to remain something of a seasonal dynamic in demand for India Pale Ale in the market, but, over the four years represented, quantities demanded, as a whole, are rising. In January, Year 1, for example, consumers demand 15,300 twelve ounce containers of IPA. In January Year 3, they demand 16,210 containers. In January Year 5, they demand 16,640. A particular dynamic in the transformation of consumer preferences would, thus, seem to suggest that tastes in this regional micro-brewed beer market are tilting toward hoppy ales, although we cannot definitively disentangle this change in preferences from the effects of market pricing (i.e. per unit cost reductions) or make any definitive arguments regarding either the pace at which quantities demanded will continue to rise in the future or the limits to such increases in quantities demanded.
Additionally, on the supply side, we have definite changes to explore, occurring at the beginning of year 4. Specifically, firm B undertakes an upgrade on its production equipment to enable it to reduce average costs in producing twelve ounce retail units of its signature beers. As a consequence, its sales of IPA jump by almost six hundred units from January Year 3 to January Year 4. If this jump appears initially as a result of reduced production costs and, hence, following the marginal cost pricing rule, reducing market prices for higher quantities of output, then we have to acknowledge that the change in quantities demanded reflects a further sustainable transformation of demand/preferences within the market, partly favoring firm B's products in relation to those of competitors. In this latter respect, proportionally, firm A appears lose the most from B's investment. Over the course of Years 4 and 5, our firm A enjoys relatively stagnant demand for its signature twelve ounce retail IPA.
Finally, as a consequence of B's investment and the overall pattern of increasing consumer demand within the regional market, we can see a pattern of convergence in market pricing. Firm F remains an obvious outlier for whom changes in overall consumer demand matter very little for its discrete and loyal share of the marketplace, but, for all other "competitors" in the market, demand for IPA is increasing over time and production costs are declining, on average, due to capital investments/increases in production scale by individual producers. Thus, assuming again that all producers are zealously following the marginal cost pricing rule, 16,210 twelve ounce units cost, on average, $2.01 per unit in January Year 3, but 16,420 containers cost, on average, $2.00 per unit in January Year 4. Intuitively, internal and/or external economies exist within the market to be exploited either by individual firms, through capital investments, or collectively by all firms, through efficiencies in rationalization of supply chains impacting the entire region.
This is the context in which our firm A has to make longer term decisions concerning investment in new capital, impacting its average costs and, thus, its competitive position within the marketplace. To further define the position of firm A, however, we need a broader portrait, outlining its average and marginal costs per unit over the period in consideration, absent significant degradations in productivity (e.g. by depreciation of capital equipment) over the same period. Table 10 lays out firm A's schedule of monthly costs over this period, granted minor short run cost discrepancies.
| X12A | TC12A | TVC12A | TFC12A | ATC12A | AVC12A | AFC12A | MC12A |
| 1,700 | 3563.8 | 3423.8 | 140 | 2.096 | 2.014 | 0.082 | 2.014 |
| 1,800 | 3766.4 | 3626.4 | 140 | 2.093 | 2.015 | 0.078 | 2.026 |
| 1,900 | 3970.5 | 3830.5 | 140 | 2.09 | 2.016 | 0.074 | 2.041 |
| 2,000 | 4176.3 | 4036.3 | 140 | 2.088 | 2.018 | 0.07 | 2.058 |
| 2,100 | 4383.9 | 4243.9 | 140 | 2.088 | 2.021 | 0.067 | 2.076 |
| 2,200 | 4593.4 | 4453.4 | 140 | 2.088 | 2.024 | 0.064 | 2.095 |
| 2,300 | 4804.8 | 4664.8 | 140 | 2.089 | 2.028 | 0.061 | 2.114 |
| 2,400 | 5018.2 | 4878.2 | 140 | 2.091 | 2.033 | 0.058 | 2.134 |
| 2,500 | 5233.8 | 5093.8 | 140 | 2.094 | 2.038 | 0.056 | 2.156 |
The output range presented above seeks to outline firm A's short run supply function, from its minimum average variable cost through its minimum average total cost and beyond to incorporate output quantities in which the microbrewery earns positive economic profits from twelve ounce containers of its signature IPA. Thus, at output quantities below 1,700 containers at a marginal cost of $2.014 for the last unit produced, the firm will cease operations in the short run. Conversely, the firm precisely exhausts its revenues from the sale of twelve ounce containers of IPA with outputs around 2,150, at which it will incur a marginal cost of $2.088 for the last unit produced. For all quantities above 2,150, the firm will earn positive economic profits.
Given the production techniques and factor compositions represented in table 10, the firm sells an average monthly volume of 2,395 containers in Year 1 with significant seasonal variations in demand. Importantly, it only generates economic losses in one month (February) when sales volumes decline to 2,100 containers. Every other month shows positive economic profits. By contrast, over the twelve monthly sales volumes recorded from Years 2 to 5, the firm's average sales volume declines to 2,179. If we decompose this further, for the months recorded from Years 2 and 3, the firm enjoys average sales volumes of 2,292, a difference from Year 1 explicable by the fact that the selected months are not characterized by spikes in seasonal demand. On the other hand, average monthly sales volumes from Years 4 and 5 decline to 2,067, well below the firm's break even volume. In fact, firm A only experiences economic losses for one of the recorded months from Years 2 and 3 (September Year 3). It experiences economic losses in every recorded month of Years 4 and 5. Emphatically, this is a significant problem if the microbrewery intends to continue producing twelve ounce containers of its signature IPA, and the problem may bear some connection to firm B's decision to invest in a lower cost technology. Proceeding from this basic conclusion, it seems clear from our analyses of market pricing in years four and five that firm A needs to either undertake an investment in lower cost technologies itself or exit the market.
Table 11 presents a possible resolution for firm A's profitability problems, contingent on the continuity of demand growth in the market for twelve ounce containers of IPA. It outlines a supply schedule with a higher fixed factor bill, suggesting a substitution of capital for labor or other short run variable factors. This technology facilitates, however, lower total factor costs relative to the technology employed in table 10.
Table 11: Monthly Production Schedule for Firm A under Newer Higher Fixed Cost Technology.
Again, proceeding from a framework in which we delineate the firm's supply schedule from its minimum average variable cost through its break even point into its range of positive economic profits, we have made a jump in the minimum output level for the firm's short run shut down boundary, from 1,700 containers in table 10 to 1,900 in table 11. Similarly, the firm's break even/product exhaustion point increases from (approximately) 2,150 in table 10 to (approximately) 2,570 in table 11. The critical point to be made in this respect is that an investment of this variety makes sense only in a context where the firm can readily expect to enjoy gains from a market in which demand growth can be readily induced. Again, firm B's earlier investment in an expanded scale of output/lower per unit pricing is suggestive of the advantageous nature of an investment by firm A.
Disaggregating the impact of the investment further, the variable factor bill incurred by the firm at 1,900 containers declines from $3,830.50 in table 10 to $3,701.20 in table 11, even as the fixed factor bill increases by $65.00. Notwithstanding the continuous rise in variable costs from the firm's shut down boundary, moreover, the firm continues to incur average variable costs less than or equal to $1.98 per container for the entire range in table 11, whereas all average variable costs in table 10 are in excess of $2.01 per container. Consequently, even as we have increased fixed factor (capital) costs, variable costs (labor and other variable factors) decline palpably per unit of output.
Transition to the newer technology outlined in table 11, again, requires that the firm invest a monthly fixed factor cost of $65. At this point, however, it would be worth bearing in mind that the fixed factor expenditure here may not be as straightforward as it seems. Again, this expenditure constitutes an assessment for the value of capital goods included in the production process, where we have only incompletely defined capital in reference to the Walrasian/Paretian firm. There, borrowing in part from the Austrian tradition, capital implied the means for increasing productivity by making production more temporally roundabout. As a prospective measurement of time, the notion of putting a price on capital based on time appears ambiguous without simultaneously applying the theory of time preferences as the foundation for interest rates. Alternatively, we could apply a price for capital grounded in the notion of replacement costs. In the latter sense, a uniform fixed factor bill across multiple periods would imply harmonization of replacement costs over an extended period approximating the productive life of an implement of capital equipment, effectively deducting a uniform share of the total replacement costs for the equipment for each production period. As such, we might interpret the fixed factor bill as a rate of depreciation. Such an interpretation might conform, to a great degree, with Classical (Ricardian, Marxian) theoretic interpretations of factor costs, but its focus on production costs is not necessarily consistent with Neoclassical modeling. However we interpret the additional $65, it remains a monthly sunk expense for the firm, invariant in relation to output.
Beyond the overall scale of this sunk expense, however, we should consider the possible sources that might facilitate such an expenditure in the adjustment of scale. For all but one of the months during Year 1, firm A enjoys positive economic profit. We should probably assume that, similarly, it enjoys economic profit during most months of Years 2 and 3. It may have, likewise, enjoyed economic profits on a seasonal basis in Years 4 and 5, even if the months for which we have records indicate that it incurred losses. Therefore, retained profits may constitute a source for the sort of capital investment undertake to realize the table 11 schedule. Conversely, firm A may have borrowed funds at a positive rate of interest to invest in the capital necessary for a scale adjustment. The difference here, of course, most readily concerns the liabilities incurred by the firm relative to servicing of debt payments. On the other hand, as we recognized in the last section, the potential for investment of retained earnings in alternative non-productive investments at a positive rate of interest raises an additional opportunity cost that the firm's proprietors have to take into account.
With all of these considerations in mind, the firm must, finally, consider the repercussions of its own capital investment strategies on market pricing, demand for its products, and demand for products, in general, across the market. In general, as we have seen, an investment by any of the above firms to reduce its per unit/container costs will lead to reduction of average prices within the market, as a whole, and, at least for high cost producers, a convergence in market pricing. In the process, accounting for an existing secular pattern of increasing quantities demanded at all prices, any decrease in market pricing may be offset by increases in demand across the market for twelve ounce containers of IPA. Conversely, as we have seen in the case of firm B's prior investment as experienced from the insular window of firm A, one firm's investment in greater productivity may simultaneously impoverish a higher cost "competitor," even to the extent that we recognize that the firms within the market are not rigorously competitive in terms of market pricing. Firm F could evidently care less if every other firm in the market invests in radically less costly technologies. But every other firm in the market is apt to experience some negative effect from a capital investment by one of its competitors. With this in mind, we should contemplate the possibility that an investment of this kind by firm A may have to be followed by successive investments in new technologies to increase its scale of output further in response to subsequent investments, particularly by firms B, C, and E. Any such investments would be apt to diminish any positive gains in productivity and profitability by firm A.
Against all of these considerations, we have the imagery of a consumer driven market where long run changes in demand are critical to the overall viability of the market for producers. In this regard, we need to ask some critical questions. What is it about India Pale Ale that attracts significant and secular growing consumer demand? How is the product consumed and are consumption patterns changing in any significant way, in particular, within the privileged regional space of this metropolitan marketplace? How can producers adjust to impending changes? Are such changes a reflection of broader macroeconomic phenomena (e.g. income/employment growth) or can they be meaningfully addressed by strategies undertaken individually or collectively by firms across the market? A serious effort to answer these questions would have to come to terms with the particular ways in which the fundamental heterogeneity of products and the overall robust degree of free entry and exit by marginal firms and product differentiation by well established firms tends to fortify robust consumer demand. Taking all these concerns into consideration, it would seem that the development of the market, at least potentially, might support an underlying contradiction. The growth of retail demand for twelve ounce containers of IPA cannot be open-ended, but at least over the extended period under consideration, it would seem to have been particularly flexible relative to capital investments by individual firms. In some way, the firms in this market are guessing on the capacity of consumers to accept minute expansions of output, given the potential for decreases in average costs/prices.
Acknowledging the demand-driven character of this heterogeneous marketplace, the question of scale economies remains open. The hypothetical production and sales data included in this section tells us very little about the internal economies of scale being exploited by individual firms. The most that we can, perhaps, conclude is that firm A has not achieved, over the period in question, a scale of production and a factor combination that objectively minimizes its average total costs in relation to given sets of relative factor costs. If its initial production technology clearly does not minimize average total costs relative to the possibility for investments in lower cost technologies, then it remains unclear that possible investment in the technology elaborated in table 11 will objectively minimize average production costs. For that matter, it is unclear whether any of the other firms, even firm D, is at a factor combination that objectively minimizes average total costs. Considering this point on internal scale economies in relation to the flexibility of demand within the market, it is unclear as to whether the market could accept a level of output at which all firms are operating under an objective average total cost minimum.
From this point in our discussion, an evident transition can be identified with respect to the theory of long run pricing developed by Viner. For the latter theory, which we will elaborate in the forthcoming section, all firms operate with production functions characterized by increasing, constant, and decreasing returns to scale. Effectively, this condition defines a universal pattern in the scalar development of all firms, determining that all firms reach objective average cost minima preceded by increasing returns and followed by decreasing returns. If the argument in this sections seeks, in some degree, to preface such a theory of long run pricing in competitive markets, then the specificities introduced here have simultaneously sought to complicate such a theory and, further, cast doubt on the suggestion that every firm in every conceivable market has an objective cost minimum that can be readily reached, given attainable levels of effective demand within the market.
| X12A' | TC12A' | TVC12A' | TFC12A' | ATC12A' | AVC12A' | AFC12A' | MC12A' |
| 1,900 | 3906.2 | 3701.2 | 205 | 2.056 | 1.948 | 0.108 | 1.948 |
| 2,000 | 4101.8 | 3896.8 | 205 | 2.051 | 1.9484 | 0.103 | 1.956 |
| 2,100 | 4298.3 | 4093.3 | 205 | 2.047 | 1.9491 | 0.098 | 1.965 |
| 2,200 | 4495.8 | 4290.8 | 205 | 2.043 | 1.95 | 0.093 | 1.975 |
| 2,300 | 4694.5 | 4489.5 | 205 | 2.041 | 1.952 | 0.089 | 1.987 |
| 2,400 | 4894.7 | 4689.7 | 205 | 2.039 | 1.954 | 0.085 | 2.002 |
| 2,500 | 5096.7 | 4891.7 | 205 | 2.039 | 1.957 | 0.082 | 2.02 |
| 2,600 | 5301.8 | 5095.8 | 205 | 2.039 | 1.96 | 0.079 | 2.041 |
| 2,700 | 5507.4 | 5302.4 | 205 | 2.04 | 1.964 | 0.076 | 2.066 |
| 2,800 | 5716.7 | 5511.7 | 205 | 2.041 | 1.968 | 0.073 | 2.093 |
| 2,900 | 5929 | 5724 | 205 | 2.045 | 1.974 | 0.071 | 2.123 |
| 3,000 | 6144.6 | 5939.6 | 205 | 2.048 | 1.98 | 0.068 | 2.156 |
Again, proceeding from a framework in which we delineate the firm's supply schedule from its minimum average variable cost through its break even point into its range of positive economic profits, we have made a jump in the minimum output level for the firm's short run shut down boundary, from 1,700 containers in table 10 to 1,900 in table 11. Similarly, the firm's break even/product exhaustion point increases from (approximately) 2,150 in table 10 to (approximately) 2,570 in table 11. The critical point to be made in this respect is that an investment of this variety makes sense only in a context where the firm can readily expect to enjoy gains from a market in which demand growth can be readily induced. Again, firm B's earlier investment in an expanded scale of output/lower per unit pricing is suggestive of the advantageous nature of an investment by firm A.
Disaggregating the impact of the investment further, the variable factor bill incurred by the firm at 1,900 containers declines from $3,830.50 in table 10 to $3,701.20 in table 11, even as the fixed factor bill increases by $65.00. Notwithstanding the continuous rise in variable costs from the firm's shut down boundary, moreover, the firm continues to incur average variable costs less than or equal to $1.98 per container for the entire range in table 11, whereas all average variable costs in table 10 are in excess of $2.01 per container. Consequently, even as we have increased fixed factor (capital) costs, variable costs (labor and other variable factors) decline palpably per unit of output.
Transition to the newer technology outlined in table 11, again, requires that the firm invest a monthly fixed factor cost of $65. At this point, however, it would be worth bearing in mind that the fixed factor expenditure here may not be as straightforward as it seems. Again, this expenditure constitutes an assessment for the value of capital goods included in the production process, where we have only incompletely defined capital in reference to the Walrasian/Paretian firm. There, borrowing in part from the Austrian tradition, capital implied the means for increasing productivity by making production more temporally roundabout. As a prospective measurement of time, the notion of putting a price on capital based on time appears ambiguous without simultaneously applying the theory of time preferences as the foundation for interest rates. Alternatively, we could apply a price for capital grounded in the notion of replacement costs. In the latter sense, a uniform fixed factor bill across multiple periods would imply harmonization of replacement costs over an extended period approximating the productive life of an implement of capital equipment, effectively deducting a uniform share of the total replacement costs for the equipment for each production period. As such, we might interpret the fixed factor bill as a rate of depreciation. Such an interpretation might conform, to a great degree, with Classical (Ricardian, Marxian) theoretic interpretations of factor costs, but its focus on production costs is not necessarily consistent with Neoclassical modeling. However we interpret the additional $65, it remains a monthly sunk expense for the firm, invariant in relation to output.
Beyond the overall scale of this sunk expense, however, we should consider the possible sources that might facilitate such an expenditure in the adjustment of scale. For all but one of the months during Year 1, firm A enjoys positive economic profit. We should probably assume that, similarly, it enjoys economic profit during most months of Years 2 and 3. It may have, likewise, enjoyed economic profits on a seasonal basis in Years 4 and 5, even if the months for which we have records indicate that it incurred losses. Therefore, retained profits may constitute a source for the sort of capital investment undertake to realize the table 11 schedule. Conversely, firm A may have borrowed funds at a positive rate of interest to invest in the capital necessary for a scale adjustment. The difference here, of course, most readily concerns the liabilities incurred by the firm relative to servicing of debt payments. On the other hand, as we recognized in the last section, the potential for investment of retained earnings in alternative non-productive investments at a positive rate of interest raises an additional opportunity cost that the firm's proprietors have to take into account.
With all of these considerations in mind, the firm must, finally, consider the repercussions of its own capital investment strategies on market pricing, demand for its products, and demand for products, in general, across the market. In general, as we have seen, an investment by any of the above firms to reduce its per unit/container costs will lead to reduction of average prices within the market, as a whole, and, at least for high cost producers, a convergence in market pricing. In the process, accounting for an existing secular pattern of increasing quantities demanded at all prices, any decrease in market pricing may be offset by increases in demand across the market for twelve ounce containers of IPA. Conversely, as we have seen in the case of firm B's prior investment as experienced from the insular window of firm A, one firm's investment in greater productivity may simultaneously impoverish a higher cost "competitor," even to the extent that we recognize that the firms within the market are not rigorously competitive in terms of market pricing. Firm F could evidently care less if every other firm in the market invests in radically less costly technologies. But every other firm in the market is apt to experience some negative effect from a capital investment by one of its competitors. With this in mind, we should contemplate the possibility that an investment of this kind by firm A may have to be followed by successive investments in new technologies to increase its scale of output further in response to subsequent investments, particularly by firms B, C, and E. Any such investments would be apt to diminish any positive gains in productivity and profitability by firm A.
Against all of these considerations, we have the imagery of a consumer driven market where long run changes in demand are critical to the overall viability of the market for producers. In this regard, we need to ask some critical questions. What is it about India Pale Ale that attracts significant and secular growing consumer demand? How is the product consumed and are consumption patterns changing in any significant way, in particular, within the privileged regional space of this metropolitan marketplace? How can producers adjust to impending changes? Are such changes a reflection of broader macroeconomic phenomena (e.g. income/employment growth) or can they be meaningfully addressed by strategies undertaken individually or collectively by firms across the market? A serious effort to answer these questions would have to come to terms with the particular ways in which the fundamental heterogeneity of products and the overall robust degree of free entry and exit by marginal firms and product differentiation by well established firms tends to fortify robust consumer demand. Taking all these concerns into consideration, it would seem that the development of the market, at least potentially, might support an underlying contradiction. The growth of retail demand for twelve ounce containers of IPA cannot be open-ended, but at least over the extended period under consideration, it would seem to have been particularly flexible relative to capital investments by individual firms. In some way, the firms in this market are guessing on the capacity of consumers to accept minute expansions of output, given the potential for decreases in average costs/prices.
Acknowledging the demand-driven character of this heterogeneous marketplace, the question of scale economies remains open. The hypothetical production and sales data included in this section tells us very little about the internal economies of scale being exploited by individual firms. The most that we can, perhaps, conclude is that firm A has not achieved, over the period in question, a scale of production and a factor combination that objectively minimizes its average total costs in relation to given sets of relative factor costs. If its initial production technology clearly does not minimize average total costs relative to the possibility for investments in lower cost technologies, then it remains unclear that possible investment in the technology elaborated in table 11 will objectively minimize average production costs. For that matter, it is unclear whether any of the other firms, even firm D, is at a factor combination that objectively minimizes average total costs. Considering this point on internal scale economies in relation to the flexibility of demand within the market, it is unclear as to whether the market could accept a level of output at which all firms are operating under an objective average total cost minimum.
From this point in our discussion, an evident transition can be identified with respect to the theory of long run pricing developed by Viner. For the latter theory, which we will elaborate in the forthcoming section, all firms operate with production functions characterized by increasing, constant, and decreasing returns to scale. Effectively, this condition defines a universal pattern in the scalar development of all firms, determining that all firms reach objective average cost minima preceded by increasing returns and followed by decreasing returns. If the argument in this sections seeks, in some degree, to preface such a theory of long run pricing in competitive markets, then the specificities introduced here have simultaneously sought to complicate such a theory and, further, cast doubt on the suggestion that every firm in every conceivable market has an objective cost minimum that can be readily reached, given attainable levels of effective demand within the market.
As a closing argument for this section, we have continuously asserted that the marginal cost pricing rule governs production volumes for each firm within the market even if a single equilibrium market price does not obtain in view of the high levels of heterogeneity for each firm's products. In this sense, the microbrewery case developed here approach a monopolistically competitive scenario, where each product defines its own market in relation to imperfect substitutes characterized by slight qualitative differences. Not seeking to precisely express the microbrewery example as monopolistic competition, I have utilized the volume weighted average price across suppliers as an axis against which, we might theorize, consumers define their own frames of reference in adjudging whether each firm's products are competitively priced. In accord with such a theory, any investment to reduce the average total costs incurred by individual firms would, ceteris paribus, have the effect of lowering the volume weighted average price across all firms to the detriment of higher cost firms who may lose a share of the market. We see this in the case of firm A after firm B's investment in lower cost technologies. Conversely, firm F appears to continuously reside in its own market to such a degree that we might rightly argue that it, alone, constitutes an example of monopolistic competition relative to the larger market for twelve ounce retail containers of IPA. Excluding firm F, we might conclude that some mechanism exists to make axial pricing an effective mechanism to correct for qualitative variations between firms and maintain competitive pressures to reduce average costs. On the other hand, we would have to specify the mechanism further, determine the information requirements that might make such an institution effect in this market, and, as such, validate axial pricing as a mechanism explaining long run developments in the market for twelve ounce retail containers of IPA.
Summarizing the larger arguments expressed here as an initial appraisal of long run pricing in Marshallian theory:
1. Long run pricing in competitive markets reflects two separate but related processes: adjustment to short run supply-chain and/or demand-driven disturbances impacting market pricing, and investment/integration of new capital and scale adjustment by firms to approach objective average cost minima.
2. Marshall's conception of the normal price represents a stable equilibrium market price, abstracting from the effects of supply-chain and/or demand-driven disturbances. By itself, this concept constitutes a starting point for a theory of long run pricing, but it abstracts from the problem of scale adjustment.
3. Reliable determination of long run prices within a given market requires relative stability or diagnosable patterns of transformation for exogenous supply chain conditions, consumer demand, production technologies, and structures of competition between firms. It, finally, requires easily exhaustible and/or diagnosable internal and/or external scale economies.
4. If conditions for reliable determination of long run prices exist, individual firms/entrepreneurs may enjoy expectations regarding the profitability of capital investments characterized by a prolonged period of integration into production. Such expectations are not guarantees, but, under circumstances in which the viability of a firm's participation in a given market is at stake, information on existing conditions may at least privilege one decision set over others.
5. Adhering to the logic of the short run marginal cost pricing rule, markets with substantial degrees of heterogeneity/qualitative variation between relatively close substitute goods and services may be characterized by an axial pricing dynamic, provided differences from the price axis can be readily explained by conditions related to individuals products or the process of exchange. Such a market might not be characterized as monopolistically competitive to the extent that the quantities demanded for the goods and services of individual firms are significantly related, in predictable ways, to the prices charged by other firms in the larger market.
6. Long run pricing in a market characterized by relatively heterogeneous goods and services may reflect a pattern of convergence on the axial price if market and/or production conditions either raise production costs for lower cost firms or generate cost reductions for higher cost firms.
Summarizing the larger arguments expressed here as an initial appraisal of long run pricing in Marshallian theory:
1. Long run pricing in competitive markets reflects two separate but related processes: adjustment to short run supply-chain and/or demand-driven disturbances impacting market pricing, and investment/integration of new capital and scale adjustment by firms to approach objective average cost minima.
2. Marshall's conception of the normal price represents a stable equilibrium market price, abstracting from the effects of supply-chain and/or demand-driven disturbances. By itself, this concept constitutes a starting point for a theory of long run pricing, but it abstracts from the problem of scale adjustment.
3. Reliable determination of long run prices within a given market requires relative stability or diagnosable patterns of transformation for exogenous supply chain conditions, consumer demand, production technologies, and structures of competition between firms. It, finally, requires easily exhaustible and/or diagnosable internal and/or external scale economies.
4. If conditions for reliable determination of long run prices exist, individual firms/entrepreneurs may enjoy expectations regarding the profitability of capital investments characterized by a prolonged period of integration into production. Such expectations are not guarantees, but, under circumstances in which the viability of a firm's participation in a given market is at stake, information on existing conditions may at least privilege one decision set over others.
5. Adhering to the logic of the short run marginal cost pricing rule, markets with substantial degrees of heterogeneity/qualitative variation between relatively close substitute goods and services may be characterized by an axial pricing dynamic, provided differences from the price axis can be readily explained by conditions related to individuals products or the process of exchange. Such a market might not be characterized as monopolistically competitive to the extent that the quantities demanded for the goods and services of individual firms are significantly related, in predictable ways, to the prices charged by other firms in the larger market.
6. Long run pricing in a market characterized by relatively heterogeneous goods and services may reflect a pattern of convergence on the axial price if market and/or production conditions either raise production costs for lower cost firms or generate cost reductions for higher cost firms.
No comments:
Post a Comment