When a firm or public enterprise prices output at marginal cost, its profit
s are related to the degree of local scale economies in its cost function.
I show that contrary to common belief, this result holds even when scale ec
onomies are affected by a rising factor supply curve. Thus marginal-cost pr
icing may be profitable even with constant returns to scale. Examples are p
rovided for a monopsonist both with and without price discrimination, and f
or a case such as highways where congestion-prone inputs are supplied by us
ers. Court rulings governing land purchase for highways illustrate: the app
licability of the results. (C) 1999 Elsevier Science S.A. All rights reserv
ed.