A Partial Rehabilitation of Hotelling's MC-Pricing Theorem.

Harold Hotelling's celebrated theorem on the optimality of marginal cost pricing was criticized first by Frisch and later by Silberberg on the grounds that he did not use the marginal cost pricing condition in his original proof and hence that it did not constitute a valid proof. This note demonstrates that a key equation in Hotelling's proof is locally satisfied if and only if prices are set equal to marginal cost at the initial equilibrium and reexamines the validity of Hotelling's proof. Copyright 2001 by American Economic Association.