Baumol cautions antitrust authorities against jumping to the conclusion that departures from marginal-cost pricing
are necessarily evidence of monopoly power.
Toward the end of his Comment Larson reproduces and states as "well known" our list of the necessary conditions for the optimality of the ECPR: (1) the monopolist's price for the complementary service has been based on a marginal-cost pricing
rule; (2) the monopolist's and rival producer's components are perfect substitutes; (3) the production technology of the component experiences constant returns to scale; (4) the rival producer has no market power; and (5) the monopolist's marginal cost of production of the component can be accurately observed.(21)
The low-price strategy makes sense on two levels: First, it approximates marginal-cost pricing
, since software, once written, costs very little for each additional copy.
We reach this conclusion even after accounting for several factors--international competition, public goods, and budget deficits--that might seem at first glance to require departures from marginal-cost pricing
. Our findings also are based on an analysis of space transportation costs, especially potential scale economies and scope economies both horizontally and vertically across stages of production.