Marginal-Cost Pricing

For firms in competitive markets, marginal-cost pricing captures the phenomenon where the market price is pushed to the marginal cost of production of the lowest-cost producers in the industry. This dynamic is driven by the exit decisions of producers with inefficient production technologies and by new entrants who imitate the most efficient producers. Under marginal-cost pricing, markets are stable, in that all firms make zero economic profit, which results in no firms exiting and no firms entering the market. Additionally, marginal-cost pricing leads to a socially efficient market that generates as much value for society as possible.