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