Friday, February 16, 2018

Trucking Costs

One little tidbit in this WSJ story on Tyson's earnings has to do with them passing on to customers the rising MC of trucking transport:
Short-term prices to secure some big rigs have jumped 20% as a result, and long-term shipping contract rates are projected to climb between 5% and 8% this year.

This provides an opportunity to test the relative competitiveness of various downstream industries. We know that the simple pricing rule is (P-MC)/P = 1/|e|. In a more competitive industry, firm's demand curves are more elastic. At one extreme 1/|e| = 1 for a monopolist and at the other, 1/|e| is zero for a perfectly competitive industry. For the former, P should rise with 0.5*MC and for the latter P should rise with 1.0*MC (the math is left as an exercise for the reader). So, for different industries and firms, is the "pass through rate" closer to 0.5 or 1.0?


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  3. No. 1/|e| does not = 1 for a monopoly. Generally, 0 < 1/|e| < 1 for a monopoly. 1/|e| = 1 when the firm maximizes total revenue. The quantity that maximizes total revenue also maximizes profit only if MC = 0.