Competition with increasing returns to scale

When I criticize mainstream economics for neglecting increasing returns to scale there is one argument that is always brought up. In its most basic form the argument goes: an industry with increasing returns to scale is a natural monopoly. Since most companies are not monopolies, increasing returns to scale must not be common. I haveContinue reading “Competition with increasing returns to scale”

Theoretical arguments against decreasing returns to scale

There is actually a fairly well known argument against the existence of decreasing returns to scale. The economist Miles Kimball gives an excellent treatment of the argument on his blog. The argument is also briefly mentioned in some graduate microeconomics textbooks, for example Microeconomic Theory by Mas-Colell and Whinston. The argument goes as follows. SupposeContinue reading “Theoretical arguments against decreasing returns to scale”

Increasing returns and decreasing costs

Before discussing evidence for the shape of cost functions it is useful to go over the relationship between cost functions and production functions. The concepts of increasing returns and increasing costs are often confused in these discussions. Empirical studies do not usually attempt to measure cost functions but instead measure properties of production functions, andContinue reading “Increasing returns and decreasing costs”

Supply and demand: reasons for scepticism

Supply and demand is perhaps the best known concept in economics. Much of undergraduate microeconomic teaching is based on this concept, and there is general agreement that it is one of the foundational concepts of the field. Even professors whose work involves challenging some of the assumptions of the field refer to it as theContinue reading “Supply and demand: reasons for scepticism”