Why Marginal Pricing?

Abstract

Under perfect competition, marginal pricing results in short-term efficiency and the subsequent right short-term price signals. However, the main reason for the adoption of marginal pricing is not the above, but investment cost recovery. That is, the fact that the profits obtained by infra-marginal technologies (technologies whose production cost is below the marginal price) allow them just to recover their investment costs. On the other hand, if the perfect competition assumption is removed, investment over-recovery or under-recovery generally occurs for infra-marginal technologies.