The Marginal Cost Controversy Revisited

Abstract

It is the basic proposition of this paper that the problem with marginal cost theory (Coase, 1946) cannot be adequately addressed within the framework of neo-classical economics. The innumerable products and services, which are available on the market, are not provided because the cost of producing the penultimate product is less than that of the last. The contemporary market is saturated with product differentiation, which is the result of innumerable relational contracts. Some degree of “monopoly” profits are, therefore, always present, thus lifting prices above average cost, at least enough to justify the entrepreneurial effort. Unlike the efficient markets of neoclassical theory, relational contracting can produce a range of prices, depending on the relative advantage of a transaction to each of the parties. This paper examines these negotiated relationships to identify the origin of relative bargaining power, and to examine the final outcomes, comparing these to those resulting from the idealized efficient market.