Michael Perelman wrote:
> research and development expenses are
> part of fixed costs.

Michael, in reading your discussion, I was led to wonder what fixed 
costs are and why they are relevant. From a forward-looking perspective 
and in the absence of various interventions, the question faced by the 
entrepreneur is whether revenues from sales will be sufficient to cover 
all costs, including research and development (R&D) costs to companies 
like Microsoft and Pfizer and the costs to railroads of laying track (or 
cable companies of laying cable). An economist who emphasizes so-called 
fixed costs, it seems to me, is one who recognizes that entrepreneur 
planning takes account of two factors. The first is the rather obvious, 
but sometimes neglected, fact that costs that are incurred before 
revenues are received. In other words, the economist is recognizing that 
real entrepreneurship entails planning in order to try to maximize. The 
second is the fact that in many cases, there are overhead costs. In this 
category are 2a, costs that must be incurred no matter how many units of 
a specific good one plans to supply and 2b, costs that may contribute to 
the production of more than one type of specific good (Marshall's case 
of joint supply). Do you mean fixed costs to refer to category 2a here? 
If so, how does this square with the examples?

As I see it, there is no obvious reason to hypothesize that competition 
would be any more or less vigorous if these factors were present in the 
calculations of entrepreneurs  than it would be if they were absent.

One element that may confuse the interpreter of history is the presence 
of capital goods. After capital goods are produced, their prices may 
rise or fall for all sorts of reasons that have nothing to do with 
depreciation and that were not predicted. Changes in capital goods 
prices may lead to a situation in which it is profitable for one 
entrepreneur to purchase all of the capital goods of a given type that 
were produced or purchased by other previously competing entrepreneurs. 
If this happens, the buyer might become a single supplier who uses this 
type of capital good in supplying some good or service. However, since 
the situation (technology, wants, availability of resources) is now 
different from that which prevailed at the start, when there were 
competing owners, one cannot legitimately deduce that competition has 
declined. One must view competition from the perspective of consumers, 
and not only of consumers of a single product but of the class of 
products that satisfy a particular class of wants, a la Kelvin 
Lancaster's definition of a goods. The nature of the particular goods 
demanded by consumers to satisfy a particular class of wants are likely 
to have changed. I don't know how one could determine whether there is 
greater or lesser competition without identifying the particular goods 
and wants. From this point of view, neither Vedder nor you seem to 
provide sufficient support for your respective propositions. (I have not 
read your book, however, so I cannot speak to the issue of whether you 
deal with the issue there.)

Another potentially confusing element is the use of the model of perfect 
competition to describe real market competition. The perfectly 
competitive model has a use in economics but it is not to describe real 
market competition. No doubt some economists have confused the model 
with reality. But no "good" economist makes this error.

With respect,

Pat Gunning