Measure Of Marginal Cost Research Articles

Optimal prices and costs for hospitals with excess bed capacity

This paper analyses theoretically and empirically issues in optimal pricing with excess hospital capacity, and then applies the analysis to the issue as to whether Medicare and Medicaid payments cover the marginal costs of treating patients of each type. The primary innovation of this paper lies in incorporating appropriate theoretical measures of hospital excess capacity to a multiproduct empirical hospital cost function, and in showing how proper measures of marginal cost can be applied to the examples of Medicare and Medicaid reimbursement in California. With a standard translog specification that ignores hospital excess capacity, the estimated marginal costs of Medicare and Medicaid patients are higher than the reimbursement. However, correctly incorporating excess capacity into our model leads to considerably lower estimates of short-run marginal costs, suggesting that Medicare hospital reimbursement is more than adequate in the short run. We also develop a third marginal cost concept, that of what long-run marginal costs would be ifexcess capacity were eliminated. This is the most theoretically appropriate measure of optimum long-run reimbursement; Medicare reimbursement also covers this measure of costs. The extent to which Medicare reimbursement covers costs thus depends crucially on whether capacity is assumed fixed or variable. Similar examples are presented for Medicaid.

Inflation dynamics: A structural econometric analysis

We develop and estimate a structural model of inflation that allows for a fraction of firms that use a backward-looking rule to set prices. The model nests the purely forward-looking New Keynesian Phillips curve as a particular case. We use measures of marginal cost as the relevant determinant of inflation, as the theory suggests, instead of an ad hoc output gap. Real marginal costs are a significant and quantitatively important determinant of inflation. Backward-looking price setting, while statistically significant, is not quantitatively important. Thus, we conclude that the New Keynesian Phillips curve provides a good first approximation to the dynamics of inflation.

Measuring Duopoly Power in the British Electricity Spot Market

This article presents an empirical study of market power in the British electricity industry. Estimates of price-cost markups are derived using direct measures of marginal cost and several approaches that do not rely on cost data. Since two suppliers facing inelastic demand dominate the industry, most oligopoly models predict prices substantially above marginal costs. All estimates indicate that prices, while higher than marginal costs, are not nearly as high as most theoretical models predict. Regulatory constraints, the threat of entry, and financial contracts between the suppliers and their customers are considered as possible explanations for the observed price levels. (JEL L13, L94)

Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914

We explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior. Direct measures of marginal cost and conduct, indicating small market power, serve as benchmarks. The more competitive models yield better cost estimates. The best cost estimates occur when conduct is estimated as a free parameter, which in turn only slightly underestimates our direct measure. It also tracks the decline in market power accompanying the industry's structural changes. The methodology is largely validated, although partial cost information can improve its predictive power. Conclusions are robust to demand function.

Biases in cost measurement for economic evaluation studies in health care.

This paper addresses the issue of biases in cost measures which used in economic evaluation studies. The basic measure of hospital costs which is used by most investigators is unit cost. Focusing on this measure, a set of criteria which the basic measures must fulfil in order to approximate the marginal cost (MC) of a service for the relevant product, in the representative site, was identified. Then four distinct biases--a scale bias, a case mix bias, a methods bias and a site selection bias--each of which reflects the divergence of the unit cost measure from the desired MC measure, were identified. Measures are proposed for several of these biases and it is suggested how they can be corrected.

Nonparametric Measures of Scale and Technical Change for Competitive Firms under Uncertainty

AbstractMeasures of scale elasticity and rate of technical change can be obtained nonparametrically in the Sandmo model of competitive firms with nonlinear risk preference responding to output price risk. Information on risk attitudes is not needed for measurement of scale elasticity because it is observable as the ratio of average to marginal cost, as in certainty models. The cross section of panel data sets can be used to develop a nonparametric marginal cost measure, which permits identification of scale elasticity; the technical change measure then follows from the scale measure and the time‐series portion of the panel data set.

Pricing in a Deregulated Environment: The Motor Carrier Experience

This paper provides a dynamic analysis of the effects of the Motor Carrier Act of 1980 on the freight rates of Class I and II common general freight carriers. In addition to estimating rate equations, cost functions are also estimated to derive reliable measures of marginal cost. The specified rate equation also includes variables expected to affect the elasticity of demand. Simulations indicate that deregulation reduced rates in the 15-20% range by 1983 and in the 25-35% range by 1985, showing that the effect has grown over time.

The Marginal Cost of International Short-Term Capital Movements

OFFICIAL ATTEMPTS to alter the balance of payments by taking advantage of the interest sensitivity of short-term capital movements have undergone critical examination in the literature. In a recent article H. Peter Gray [4] stressed the permanent increase in net interest payments as the marginal balance of payments cost of raising interest rates to improve the capital account. Subsequently Henry N. Goldstein [3] criticized Gray for misspecifying the capital and current account effects. In this paper a method felt to be more rigorous than that employed by these writers is used to derive the marginal cost measure. Its particular advantage is to illuminate the role played by the forward exchange market in response to a higher domestic interest rate, a matter which Goldstein emphasized. In contrast to the previous studies this paper first demonstrates that knowledge of the actual capital flows and subsequent changes in interest payments is insufficient for an adequate determination of the marginal cost. Secondly, it is shown that increased responsiveness of the actual capital flow to changes in interest rates does not necessarily lower the marginal cost, as the two studies imply. Finally, the marginal cost of higher interest rates is compared with that of forward intervention undertaken for the same purpose, and they are proven identical. Policy-makers must adopt criteria other than marginal balance of payments cost if they wish to use either policy as a balance of payments weapon. Section 2 briefly reviews Gray's analysis and Goldstein's criticisms. It then considers the relevance of the marginal balance of payments cost concept. Section 3 presents a model of the spot and ferward exchange markets, which is used in Section 4 to derive the opposing temporary and steady-state balance of payments effects of higher domestic interest rates. The determination of marginal balance of payments cost easily follows along with a discussion of forward intervention. Section 5 summarizes the results.