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Date: | Wed Jan 24 15:58:56 2007 |
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Pat asks if I meant by fixed costs expenses, such as laying track or investing in
research. The answer is yes.
He suggests that entrepreneurs should factor in fixed costs before making their
investment. The answer here, like most economic answers is yes and no. Before I
explain further, recall that competitive pricing should mean that prices would go
down to near marginal costs once the investment is sunk. As a result, competition
and profitability would have trouble coexisting.
In my book, I went to great lengths explaining that this thinking was central to the
major American economists -- the same ones who founded the American Economic
Association, including John Bates Clark. These economists wrote textbooks advocating
competitive markets, but when they turn to the actual functioning of high fixed cost
industries, such as the railroads, they advocated limits on competition to prevent
universal bankruptcy.
So the entrepreneur would do well to avoid industries with such a cost structure.
Perhaps those who jump in, like the sort of anticipatory powers that Pat would
attribute to entrepreneurs.
Michael Perelman
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