Re: Sunk Costs and Nike and Captialism

["Chris Barrett" <BARRETT@xxxxxxxxxxxxxxxxxx>]

Gil Skillman writes

> No disagreement that capitalism is wasteful, but I didn't think that
> overhead costs had *any* particular implications "for the MC=MR type
> of thinking."  For instance, even with overhead costs, profit-
> maximizing price discrimination typically implies MR = MC conditions.

Remember two of the crucial assumptions of introductory micro: free
entry and exit, and no uncertainty (or risk, for any of you who like
to distinguish between the two).  Sunk costs destroy the free
entry/exit assumption, with its implications for competitive pricing,
zero marginal profits, etc.   If one adds uncertainty, the
problems are compounded substantially, creating strong status quo
biases among profit maximizing firms.  Gil is, of course, right that
MR=MC is the a priori optimality condition for profit maximization,
whether under perfect competition or pure monopoly/monopsony, but the
difference in market structure is terribly important.  The MC=MR
condition falls in the presence of uncertainty (whether or not agents
are risk averse).

Chris
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