4
$\begingroup$

I was trying to find some kind of survey of the empirical literature on the evidence of firms operating under rising marginal costs. Recently I was in contact with Alan Blinder's 1998 book Asking About Prices: A new Approach to Understand Price Stickeness and the book shows a research on firms mentioning that they operate mostly under falling or constant marginal costs (in USA, almost 90% of them).

While I can raise some issues regarding the research, such as being the product of answers from the firms or that marginal costs are often not observed and must be estimated, I could not find a survey of the literature confirming this assumption (the evidence for behavior under rising marginal costs). Would anyone know where to begin?

$\endgroup$
  • 1
    $\begingroup$ Seems to me you should be open to accepting evidence either confirming or contradicting your assumption, as long as it is valid empirical evidence. $\endgroup$ – Giskard Sep 21 '16 at 10:51
  • 1
    $\begingroup$ Yes, I agree. But in economics, I gather, you don't accept the results of one paper as the "general truth" on the matter (I understand this is an awkward definition), but the results of many. That is why I was asking for a survey on the literature if it does exist. $\endgroup$ – John Doe Sep 22 '16 at 13:08
1
$\begingroup$

Based on data/work with consultants/business school discussions with executives: A good example of a set of industries where marginal costs are rising is commodity production (metals, agricultural products, and energy such as oil). In such industries, companies own many plants (Glencore, BHP Billiton) and they tend to switch on production in a plant when the price is above the marginal cost of that plant. So it makes sense to order plants in increasing order of their marginal cost, and assume that the lowest-marginal-cost plant will be the last one to be shut down. Of course if the firm acquires a plant that has a lower marginal cost than the lowest-marginal-cost plant, it will shift that firm's marginal cost curve. Look for Carmin Nappi's slides online on the aluminum industry, plenty of that analysis going on.

Some of the slides are in here, see slide 11. http://www.riotinto.com/documents/Media-Speeches/Rio_Tinto_Alcan_Carmine_Nappi_11_June_2008.pdf

Now this is a similar framework adopted by Pindyck, for instance in http://www.jstor.org/stable/41322920?seq=1#page_scan_tab_contents.

$\endgroup$
0
$\begingroup$

Very few to no firms operate under rising marginal costs for all operations. A good example of an instance where rising marginal costs exist, is when building a skyscraper each additional floor costs more to build than the last one. You need to hire a bigger crane, reinforce the lower floors more, install elevators etc.

I'm not quite sure what you mean by empirical literature on rising marginal cost? Any good econ textbook would provide examples such as those. What type of literature are you looking for exactly?

$\endgroup$
  • $\begingroup$ Estimated evidence on rising marginal costs on multiple industries. As I mentioned above, a survey (on the estimation of marginal costs, for instance). $\endgroup$ – John Doe Sep 19 '16 at 22:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.