Pricing and Marginal Cost

Café Hayek has a good post on pricing and marginal cost:

Economists: loose your devotion to marginal-cost pricing. The best prices are not necessarily those that equal marginal cost. Prices above marginal cost help convey important information "“ namely, information about the value of the capital invested that makes provision of the good or service possible in the first place. This information, in turn, is important to entrepreneurs searching for profitable places to invest their money and energies.

This article is particularly helpful in the context of pharmaceutical cost regulation.  Activists of the socialist/progressive bent consider any pricing above marginal cost to be evidence of monopoly, market failure, rapacious greed or all of the above -- but in any case a call for government action.  This article helps reinforce the case of why pricing above marginal cost is not necessarily a market "failure".  In the case of US Pharmaceutical pricing, drug pricing today is evidence of market failure only if one wishes to see the market fail to develop any new drugs in the future.

  • http://cyberlibris.typepad.com/blog/2005/01/how_much_should.html Cyberlibris blog

    How Much Should You Charge?

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