The folly of setting prices
Letter to the Editor:
John Quiggin ('Microsoft deserves a hard time' AFR 11 Nov) demonstrates gaping holes both in his knowledge of competition law and in his awareness of the importance of incentives for innovation. He argues that Microfoft's Windows should be 'declared' by the ACCC as an essential facility and be required to be sold at marginal costs.
Neither the ACCC nor other government price fixing authorities specify marginal cost principles as an appropriate basis for price setting. The ACCC's favoured approach, 'provides for a normal commercial return on efficient investments in infrastructure (in the long term) ... (and so) provides the appropriate incentives for future investment.'
A moment's consideration reveals the folly of a regulator setting prices based on marginal costs. The message such an approach delivers to innovators is, 'Don't incur the costs in the first place'. Dr Quiggin's prescriptions are for a static world where all innovation has ceased and the only task is to milk the incumbent suppliers. The policy approach he advocates would create that static world for Australia.