By P. W. S. Andrews, Elizabeth Brunner (auth.)
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Extra resources for Studies in Pricing
It is therefore reasonable for a firm to price as though its long-run average costs would be constant, although hoping to do somewhat better than that if it actually grows. These considerations explain why businesses should settle their prices for existing products, as practical inquiry finds they do, in terms of their current short-run costs .. The behaviour of short-run costs is therefore of explicit importance. 27 Competitive Prices, Normal Costs and Stability AFC ----------- ------AD C 0 Production Figure 4 Empirical work has shown that businesses assume that average direct costs per unit, as 'costed' for any specific product, will be constant at any given time.
Smaller firms will have their own advantages in speciality products which require very special care in their manufacture or very special attention to the time and manner of meeting their customers' wants. The smaller firm may supply the odd need for quick delivery, perhaps of a varied range of specifications. It will not be Courtaulds who supplies the occasional beam of experimental material. It will not be Guest, Keen and Nettlefolds who supplies a small number of screws of peculiar specifications.
8 This would appear to go back to static pure-competition analysis, with the marginal firm waiting in the wings, as it were, smaller, more ignorant, less efftcient than firms already established in the industry. But Andrews has pointed out the importance of cross-entry competition, ie. firms already established in other product markets who can move into this market. These may be firms in quite a different industry which are seeking diversification. It may be a fum integrating backwards to control its supply of materials, or integrating forward to control its immediate market.