Marginal Cost "Nonsense" Underlies Moral Opprobrium, Expert Says
WASHINGTON D.C. - Taking dead aim at a near-holy shibboleth of the economics profession - in a competitive market, prices equal marginal cost - The Progress & Freedom Foundation's James V. DeLong is upsetting intellectual apple carts with his new assessment of the "hysterical assault" on the pharmaceutical and entertainment industries. In an article posted at TechCentralStation - "Marginalized" - DeLong writes that the "demonization" of companies that deal in intellectual property is "baffling" and "not tolerable." He says the time has come for economists and those who use their arguments "to stop misleading a gullible public."
"Much of the demonization comes from the left, particularly academia, powered by intellectuals' habitual disdain for the market and lust for a government run by themselves," DeLong writes. But "the deeper problem is that this disdain has found a lever to wield that has been created by the real culprit - the economics profession." Many in that profession argue the marginal cost of producing another pill, song or movie approaches zero, and that marginal prices should be set accordingly. "Any other condition demonstrates that undue 'market power' exists, and is immoral," he writes. What the theory misses, DeLong argues, are such realities as capital costs, interest and depreciation. In addition, the theory is a mere snapshot that ignores the "time dimension" of marginal costs.
"In the real industrial world, marginal cost is simply the lower bound on price, not the ideal," he concludes. "A company will sometimes sell at this level, but its overall price level must be sufficient to cover every cost, and to conceive of marginal cost pricing as the ideal is demented." Before, heavy investment costs helped companies to "not get caught in the death spiral of marginal cost pricing," he writes. "But the IP industries have been stripped of this protection." Drug companies face huge initial investment and regulatory costs, and the entertainment industry faces "the new reality that duplicating and transmitting bits takes no capital investment, once the basic computer and telecom networks are in place, so the cost barrier has vanished completely."
The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.