Declining Marginal Cost Industries in the Global Information Age
On May 6 and 7, 2004, the Competitive Enterprise Institute, in partnership with the Progress and Freedom Foundation, hosted a workshop on declining marginal cost industries. The workshop surveyed pricing practices in the digital media, network, pharmaceutical, and transportation industries.
The declining marginal cost problem remains the key challenge to a range of industries. As Ronald Coase long ago noted, a declining cost industry must find some way to finance itself: either via creative multipart pricing (facilitated by bundling or contracts) or via some form of government subsidy. The markets solution has traditionally relied on distinct marketing strategies in different geographic regions and to different segments of the markets, with market segmentation facilitated by the high costs to consumers of transport and/or the difficulty of acquiring information about the prices paid by others. The government subsidy approach inevitably entails government regulatory and /or price controls (there are no “free” subsidies). Clearly, we prefer the market solution.
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